Question

IM GONNA CRY MY EYES OUT PLEASE HELP ME Type the correct answer in the box. Spell the words correctly.
Debt Capital
$80,000
Income before interest and tax $50,000
Interest on debt capital 5%
Tax rate
40%
What is the net savings on the interest calculated after tax?
The after-tax cost of debt capital is
percent

Answer 1

Answer: 3%

Explanation:

Interest is tax deductible which means that companies are charged taxes only after they pay off the interest they owe on debt.

In order to calculate the after-tax cost of debt, use the following formula:

= Interest rate * ( 1 - tax rate)

= 5% * ( 1 - 40%)

= 3%