Question

Genetech has $4,000,000 in assets. It has decided to finance 30% with long-term financing (9% rate) and 70% with short-term financing (7%) rate. Assuming a 40% tax rate, what will its annual after-tax interest costs be?

Answer 1

After-tax interest cost			=	Before Tax Interest rate*(1-Tax Rate)
			=	((30%*9%)+(70%*7%))*(1-40%)
			=	4.56%
Alternatively,
		Amount	Interest rate	Before tax Interest cost		After tax Interest cost
		a	b	c=a*b		d=c*(1-40%)
Long term finance		$       12,00,000	9%	$      1,08,000		$       64,800
Short term finance		$       28,00,000	7%	$      1,96,000		$   1,17,600
Total		$       40,00,000				$   1,82,400
After tax interest cost			=	$      1,82,400	/	$ 40,00,000
			=	4.56%