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On January 1, Year 1, Brown Co. issued bonds with a face value of $200,000, a stated rate of interest of 10%, and a 20-year term to maturity. The bonds were issued at face value. If Bluefield's tax rate is 40%, what is the after-tax cost of borrowing related to these bonds for Year 1?

Respuesta :

Answer:

the after tax borrowing cost is $12,000

Explanation:

The computation of the after tax borrowing cost is shown below;

= Annual interest - tax savings

= ($200,000 ×0.10)  - ($200,000 × 0.40)

= $20,000 - $8,000

= $12,000

hence, the after tax borrowing cost is $12,000

We simply applied the above formula so that the correct value could come

And, the same is to be considered

Tundexi

The after-tax cost of borrowing related to these bonds for Year 1 is $12,000.

Given Information

Face Value of Bond = $200,000

Rate of Interest 10 % p.a.

Tax Rate 40%

  • The calculation of the After-tax cost of borrowing is as follows:

Cost of Borrowing of Bond for Year 1 (Before Tax)

= $200,000 * 10%

= $200,000 * 0.10

= $20,000

Cost of Borrowing of Bond for Year 1 (After Tax)

= $20,000 * (1 - 40%)

= $20,000 * 0.60

= $12,000

Therefore, the after-tax cost of borrowing related to these bonds for Year 1 is $12,000.

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