Question

The following information is available for three companies: Rope Co. Chain Co. Line Co. Face value...

The following information is available for three companies:

Rope Co. Chain Co. Line Co.
Face value of bonds payable $ 270,000 $ 696,000 $ 668,000
Interest rate 6 % 5 % 4 %
Income tax rate 30 % 15 % 20 %


Required
a. Determine the annual before-tax interest cost for each company in dollars.



b. Determine the annual after-tax interest cost for each company in dollars. (Round your answers to the nearest dollar amount.)



c. Determine the annual after-tax interest cost for each company as a percentage of the face value of the bonds. (Round your answers to 1 decimal place.)

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Homework Answers

Answer #1
  1. Annual before tax interest = Face value X interest

Rope Co. = 270,000 X 6% = 16,200

Chain co. = 696,000 * 5% = 34,800

Line Co. = 668,000 * 4% =26,720

  1. annual after-tax interest cost = Interest X (1- tax rate)

Rope co. = 16,200 (1-0.3) = 11,340

Chain co. = 34,800 (1-0.15) = 29,580

Line Co. = 26,720 (1-0.2) = 21,376

  1. annual after-tax interest cost for each company as a percentage = Interest net of tax/face value

Rope co. = 11340/270,000 = 4.2%

Chain co. = 29580/696,000 = 4.25%

Line Co. = 21376/668,000 =3.2%               

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