Only solve problem 4. Thanks A company paid $2,400,000 interest on its debt per

Question

Only solve problem 4. Thanks

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

Explanation / Answer

9.3% is the answer for question 3. Debt interest = 2.4*14 + 2 = 35.6.

But this 35.6 is tax exempt i.e. post-tax cost of debt is calculated as

post-tax cost = pre-tax cost *(1-tax rate)

= 9.3*(1-0.29)

= 6.6% is the company's cost of debt capital after taxes.

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