A company paid $2, 400,000 interest on its debt per year. It borrowed $38,000,00

Question

A company paid $2, 400,000 interest on its debt per year. It borrowed $38,000,000 in year 0. The company paid off the principal in year 15 with a single amount of $40,000,000 What was the company's cost of debt capital before taxes? Choose the closest option. 6.5% 8% 9.3% 6.2% Use the same information, from the previous problem (#3). If the company's effective tax rate is 29%, what was the company's cost of debt capital after taxes? Round your answer to the nearest whole percentage. Your answer is assumed to be a percentage, so DO NOT enter a %. Enter something like: XY or X Use the same information, from the previous problem (#3). If the company's effective tax rate is 29%, what was the company's cost of debt capital after taxes? Round your answer to the nearest whole percentage. Your answer is assumed to be a percentage, so DO NOT enter a %. Enter something like: XY or X

Explanation / Answer

After tax cost of debt = Pre-tax cost of debt X ( 1 - Tax rate)

Tax rate = 29%

Pre-tax cost of debt is not given in the question

The after tax cost of debt is shown here for a pre - tax cost of debt rate of 6.5%

The same procedure can be followed for any value of pre-tax cost of debt

After tax cost of debt = 0.065 ( 1 - 0.29)

After tax cost of debt = 4.615

After tax cost of debt = 5 ( rounded to nearest whole number)

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