If a corporation issued $9,000,000 in bonds which pay 5% annual interest, what is the annual net cash cost of this borrowing if the income tax rate is 30%?
A)$4,500,000
B)$135,000
C)$450,000
D)$315,000

Question

Quizplus · Accepted Answer

The annual interest payment is $9,000,000 * 5% = $450,000. The tax shield from the interest is $450,000 * 30% = $135,000. Therefore, the net cash cost is $450,000 - $135,000 = $315,000.

If a Corporation Issued $9,000,000 in Bonds Which Pay 5