Determine the (after-tax)component cost of a $50 million debt issue that the Mattingly Corporation is planning to place with a large insurance company. Assume the company is subject to a 40% tax rate. This long-term debt issue will yield 12% to the insurance company.

Question

Quizplus · Accepted Answer

The after-tax component cost of debt can be calculated using the following formula:
After-tax cost of debt = Pre-tax cost of debt x (1 - tax rate)
In this case, the pre-tax cost of debt is 12% and the tax rate is 40%.
After-tax cost of debt = 12% x (1 - 0.40) = 7.2%
Therefore, the after-tax component cost of the $50 million debt issue is 7.2%. The answer is B.

Determine the (After-Tax)component Cost of a $50 Million Debt Issue