Use the tables for the question(s)below.
Pro Forma Income Statement for Ideko, 2013-2018
Pro Forma Assets & Liabilities for Ideko, 2013-2018

-Compute the after-tax interest expense for a firm with Interest earned from Excess Cash = $5 000, Interest on Debt = $8 000, and a tax rate of 30%.
A)$2 500
B)$2 700
C)$2 100
D)$2 200

Question

Use the tables for the question(s)below.
Pro Forma Income Statement for Ideko, 2013-2018
  Pro Forma Assets & Liabilities for Ideko, 2013-2018
 
-Compute the after-tax interest expense for a firm with Interest earned from Excess Cash = $5 000, Interest on Debt = $8 000, and a tax rate of 30%.
A)$2 500 
B)$2 700 
C)$2 100 
D)$2 200

Quizplus · Accepted Answer

The after-tax interest expense is calculated by taking the interest on debt and subtracting the tax shield. The tax shield is the interest on debt multiplied by the tax rate. So, $8,000 * 0.30 = $2,400. The after-tax interest expense is $8,000 - $2,400 = $5,600. However, since the interest earned from excess cash is $5,000, the net interest expense is $8,000 - $5,000 = $3,000. The after-tax interest expense is then $3,000 * (1 - 0.30) = $2,100.

Use the Tables for the Question(s)below