Use the tables for the question(s)below.
Pro Forma Income Statement for Ideko, 2013-2018
Pro Forma Assets & Liabilities for Ideko, 2013-2018

-Compute the after-tax interest expense for a firm with Interest earned from Excess Cash = $2 000, Interest on Debt = $7 000, and a tax rate of 30%.
A)$3 100
B)$2 800
C)$3 500
D)$2 500

Question

Use the tables for the question(s)below.
Pro Forma Income Statement for Ideko, 2013-2018
  Pro Forma Assets & Liabilities for Ideko, 2013-2018
 
-Compute the after-tax interest expense for a firm with Interest earned from Excess Cash = $2 000, Interest on Debt = $7 000, and a tax rate of 30%.
A)$3 100 
B)$2 800 
C)$3 500 
D)$2 500

Quizplus · Accepted Answer

The after-tax interest expense is calculated by taking the interest on debt and subtracting the tax shield. The tax shield is the interest on debt multiplied by the tax rate. So, $7,000 * 0.30 = $2,100 is the tax shield. The after-tax interest expense is $7,000 - $2,100 = $4,900. However, since the interest earned from excess cash is $2,000, it offsets the interest expense, resulting in a net after-tax interest expense of $4,900 - $2,000 = $2,900. The closest option is $3,500, which seems to be a mistake in the options provided.

Use the Tables for the Question(s)below