Compute the after-tax interest expense for a firm with Interest on Excess Cash = $1000,Interest on Debt = $5000,and a tax rate of 30%.
A)$2500
B)$2800
C)$3100
D)$3300
E)$3500

Question

Quizplus · Accepted Answer

The firm's total interest expense is the sum of interest on excess cash ($1000) and interest on debt ($5000), which equals $6000.

However, since the company is able to deduct the interest on debt when calculating taxable income, the after-tax interest expense is reduced by 30%.

Therefore, the after-tax interest expense is $6000 * 0.7 = $4200.

The question only asks for the after-tax interest expense of the debt, so we subtract the interest on excess cash:

$4200 - $1000 = $3200

Therefore, the answer is B) $2800.

Compute the After-Tax Interest Expense for a Firm with Interest