One of the advantages of borrowing is that interest is deductible for income tax purposes.a. If a company pays 8 percent interest to borrow $500,000, but is in an income tax bracket thatrequires it to pay 40 percent income tax, what is the actual net-of-tax interest cost that thecompany incurs?b. What is the effective interest rate that is paid by the company?

One of the advantages of borrowing is that interest is deductible for income tax purposes.a. If a company pays 8 percent interest to borrow $500,000, but is in an income tax bracket thatrequires it to pay 40 percent income tax, what is the actual net-of-tax interest cost that thecompany incurs?b. What is the effective interest rate that is paid by the company?

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter3: Organizing And Financing A New Venture

Section: Chapter Questions

Problem 7EP

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