Question

Westford Corporation has $185 million dollars of interest-bearing debt outstanding at the end of fiscal 2014 year. In addition, the company incurred $26 million dollars of interest expense in 2014.
If the company has a marginal tax rate of 35% calculate Westford's cost of debt capital.

A) 14.1%

B) 9.1%

C) 9.8%

D) 11.1%

Answer 1

Answer:

B) 9.1%

Explanation:

Cost of debt is the interest rate paid by a company due to borrowing money; i.e  debt from investors.

$185million in debt is the face value of debt that Westford Corporation had and the $26 million dollars of interest expense is the cost of the debt in dollars;

First, find pretax cost of debt ;

Pretax cost of debt = (Interest expense / Face value of debt )*100

= (26,000,000/ 185,000,000 )*100

=0.1405 *100

= 14.05%

Next, use pretax cost of debt to find after-tax cost of debt;

After-tax cost of debt = Pretax cost of debt (1-tax)

= 14.05% *(1-0.35)

= 9.13%

Therefore, Westford's cost of debt capital is 9.1%