The tax-exempt Goodsmith Charitable Foundation issued debt last year at 12 percent to help finance a new playground in Los Angeles. This year the cost of debt is 15 percent higher; that is, the companies that paid 14 percent of the debt last year will pay 16.10 percent this year.

Required:

a. If the Goodsmith Charitable Foundation borrowed money this year, what would be the after-tax cost of debt, based on last year's cost and the 15 percent increase? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.)

b. If the foundation's receipts are determined to be taxable by the IRS (at a rate of 40 percent due to his involvement in political activities), what would be the after-tax cost of debt? (Do not round intermediate calculations. Enter your answer as a percentage rounded to 2 decimal places.)

Answer rating: 100% (QA)

a To calculate the aftertax cost of debt we need to first calculate the beforetax cost of ... View the full answer