Question

The Goodsmith Charitable Foundation, which is tax-exempt, issued debt last year at 8 percent to help finance a new playground facility in Los Angeles. This year the cost of debt is 25 percent higher; that is, firms that paid 10 percent for debt last year will be paying 12.50 percent this year. a. If the Goodsmith Charitable Foundation borrowed money this year, what would the aftertax cost of debt be, based on their cost last year and the 25 percent increase?

Answer 1

Answer:

10%

Explanation:

Given that,

Interest at last year debt = 8%

Current year cost of debt = 25% higher

Firms paid for debt last year = 10%

Firms paid for debt in current year = 12.50%

Kd - cost of debt

Yield = Interest at last year debt × (1 + increase in cost of debt)

         = 8% × (1 + 0.25)

         = 8% × 1.25

         = 10%

Kd = Yield (1 – T)

Kd = 10% (1 – 0)

     = 10% (1)

     = 10%

Therefore, after tax cost of debt would be 10%.