Question

The Goodsmith Charitable Foundation, which is tax-exempt, issued debt last year at 10 percent to help finance a new playground facility in Los Angeles. This year the cost of debt is 30 percent higher; that is, firms that paid 12 percent for debt last year will be paying 15.60 percent this year. a. If the Goodsmith Charitable Foundation borrowed money this year, what would the aftertax cost of debt be, based on their cost last year and the 30 percent increase? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Aftertax cost of debt ſ % b. If the receipts of the foundation were found to be taxable by the IRS (at a rate of 35 percent because of involvement in politica activities), what would the aftertax cost of debt be? (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Aftertax cost of debt

Answer 1

A C D 1 2 a. b. After tax cost of tax After tax cost of tax 13% 8.45% = 4 Workings: Cost of Debt 10% X 1.3 13% After tax cost of tax Cost of Debt (1 - Tax rate) 13% X (1-0) 13% Note: No tax applied on amount borrowed by charitable foundation Cost of Debt 10% X 1.3 13% After tax cost of tax = Cost of Debt (1 - Tax rate) 13% X(1 -0.35) 8.45%