11. The Barksdale Foundation, which is tax-exempt, issued debt last year at 8% t
ID: 2785165 • Letter: 1
Question
11. The Barksdale Foundation, which is tax-exempt, issued debt last year at 8% to help finance a new soccer complex at Warwick High School. This year the cost of debt is 45 percent higher—that is firms that paid 13% for debt last year will be paying 18.85% this year. a. If the Barksdale Foundation borrowed money this year, what would the after-tax cost of debt be, based on their cost last year and the 45 percent increase (3 points)? b. If the receipts of the foundation were found to be taxable by the IRS (at a rate of 30 percent because of involvement in political activities), what would the after-tax cost of debt be (3 points)?
Explanation / Answer
a.
Since company is tax exempted, so after tax cost of debt is equal to before tax cost of debt.
Last year cost of debt = 8%
This year cost of debt = 8% × (1 + 45%)
= 11.60%
If the BarksdaleFoundation borrowed money this year, then before tax cost of debt would be 11.60% and after tax cost of debt would be same that is 11.60%.
b.
If the receipts of the foundation were found to be taxable by the IRS at 30% tax rate.
Then,
After tax cost of debt = 11.60% × (1 - 30%)
= 8.12%
After tax cost of debt this year would be 8.12%.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.