One of the advantages of borrowing is that interest is deductible for income tax purposes.
a.
If a company pays 8 percent interest to borrow $500,000, but is in an income tax bracket that requires it to pay 40 percent income tax, what is the actual net-of-tax interest cost that the company incurs? (Omit the "$" sign in your response.)
Actual net-of-tax interest cost $
b.
What is the effective interest rate that is paid by the company?
netoftax=.08*500,000(1-.4)=24,000 check that, I did it in my head.
effective inerest rate=24/500= 4.8 percent