Question

If a corporation issued $3,000,000 in bonds which pay 10% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?

Answer 1

Answer:

$210,000

Explanation:

Cost of Borrowings (Interest expense) = Amount of Borrowings * Rate of Interest = $3,000,000 * 10% = $300,000

Tax on Borrowings = Cost of Borrowings * Rate of tax = $300,000 * 30% = $90,000

Net Cost of Borrowings = Cost of Borrowings - Tax on Borrowings

Net Cost of Borrowings = $300,000 - $90,000

Net Cost of Borrowings = $210,000

So, the annual net cash cost of this borrowing if the income tax rate is 30% is $210,000.