For each of the following situations, determine the entity's after-tax cost of borrowing:
a. A corporation has a $5,000,000 bond with a coupon rate of 8 percent. The corporation has a tax rate of 25 percent.
b. A small business has a three-year, $500,000, 5 percent note payable with a supplier.
The small business has a tax rate of 13 percent.
c. A not-for-profit organization, which doesn't have to pay tax, has a $125,000 bank loan at the prime lending rate plus 2.5 percent. For the year just ended, the prime lending rate was 3 percent.
d. How is an entity's after-tax cost of borrowing affected by its tax rate? Is it more desirable for an entity to have a higher tax rate so that it can lower its after-tax cost of borrowing? Explain.

  • CreatedFebruary 26, 2015
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