To increase its market share, Sole Brother Inc. decided to borrow $50,000 for mo

Question

To increase its market share, Sole Brother Inc. decided to borrow $50,000 for more advertising for its shoe retail line. The loan is to be paid in four equal annual payments with 15% interest. The loan is discontinued 12 points. The first 6 "points" are an additional interest charge of 6% of the loan deducted immediately from what is recieved from the $50,000 loan. Another 6 points or $3,000 of additional interest is deducted as four $750 additional annual interest payments. What is the after-tax interest rate on this loan, if the firm's combined tax rate is 40%?

Explanation / Answer

After tax interesr rate on the loan would be

15% * (1-tax rate)

15% * 60%

= 9%

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