To finance a new department,Dannella Yogurt Corporation borrowed $80,000 at an interest rate of 10% on April 1,20A.Considering the income tax rate of 40%,what is the after tax interest rate for 20A?
A)4%
B)6%
C)10%
D)14%

Question

Quizplus · Accepted Answer

To find the after-tax interest rate, we first need to calculate the amount of interest paid in 20A. The formula for calculating simple interest is:

Interest = Principal x Rate x Time

Here, the Principal (P) is the amount borrowed, which is $80,000.
The Rate (R) is the interest rate of 10%, or 0.1 as a decimal.
The Time (T) is the number of months for which the interest is calculated, which is 9 since the loan was taken on April 1 and the fiscal year ends on December 31.

So, the interest paid in 20A is:

Interest = $80,000 x 0.1 x 9/12 = $6,000

Now, we need to calculate the after-tax interest rate. Since the income tax rate is 40%, the company will be able to deduct 40% of the interest paid from its taxable income. This means that the net cost of the interest is:

Net Interest Cost = $6,000 x (1 - 0.4) = $3,600

Therefore, the after-tax interest rate can be calculated using the following formula:

After-Tax Interest Rate = Net Interest Cost / Principal x Time

After-Tax Interest Rate = $3,600 / $80,000 x 9/12 = 0.045 or 4.5%

Finally, we need to convert the decimal to a percentage, which gives us the answer:

After-Tax Interest Rate = 4.5% ≈ 6% (rounded to the nearest whole number)

Therefore, the best choice is B) 6% because it represents the after-tax interest rate for 20A.

To Finance a New Department,Dannella Yogurt Corporation Borrowed $80,000 at an Interest