A company with a tax rate of 40% borrows $100M from lender A at a cost...

A company with a tax rate of 40% borrows $100M from lender A at a cost of 8% and $300M from lender B at a cost of 6%. What is the firm’s aggregate cost of borrowing (a) before taxes; and (b) after taxes?

Expert Solution

Borrowing from lender A= $100 million

Borrowing from lender B= $300

Total debt= $400 million

Debt from lender A= $100 / $400 million

= 0.25*100= 25%

Debt from lender B= $300 / $400 million

= 0.75*100= 75%

(a)Aggregate before tax cost of debt= 0.25*8% + 0.75*6%

= 2% + 7450%

= 6.50%.

(b) Aggregate after tax cost of debt= before tax cost of debt*(1 – tax rate)

= 6.50%*(1 – 0.40)

= 3.90%.

In case of any query, kindly comment on the solution.

jeff jeffy answered 4 months ago

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