In September 1995, McDonalds Corporation issued $150 million in senior notes due 2005. The notes were issued
Question:
In September 1995, McDonalds Corporation issued $150 million in senior notes due 2005. The notes were issued at par and bore interest of 6 5/8%, paid semiannually (i.e., interest of $33,125 per $1,000, the bonus would be paid twice a year). The debt was rated AA by moodys. Interest payments on this debt were deductible for corporate tax purposes (you can assume McDonald's marginal corporate tax rate was 35%), although principal repayments were not. All of the principal would be paid in September 2005.
A. From McDonald's perspective, what is the effective after-tax cost of this debt (expressed as an annual percentage)?
B. How many tax dollars will McDonald's save each year by deducting the interest expense on these notes from taxable income (can you assume that McDonald's will have enough taxable income in future years to cover the interest expense on this debt)? What is the present value of these future tax savings?
Expert Answer:
