In order to finance a new project, a company borrowed $4,000,000 at 8% per year with the
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In order to finance a new project, a company borrowed $4,000,000 at 8% per year with the stipulation that the company would repay the loan plus all interest at the end of one year. Assume the company’s effective tax rate is 39%. What was the company’s cost of debt capital
(a) Before taxes,
(b) After taxes?
(c) Compare the calculated after-tax cost with the approximated cost using Equation [10.4].
Equation [10.4]
After-tax cost of debt capital = (before-tax cost)(1 − Te)
Cost Of DebtThe cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking...
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a Beforetax cost of debt capital is 8 b Interest 4000000008 320000 Tax savings 32000...View the full answer
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