Calculate the aftertax cost of debt under each of the following cond itions Yield Corporate Tax Rate a.8.0% 18% b.120% 34% c.10.6% 15% Solution: Kd Yield(1-T Yield Yield (1-T) a.8.0% (1-.18) 6.56% b.120% 792% C.10.6% 9.01% 11-4 The Millennium Charitable Foundation, which is tax-exempt, issued debt last year at 8 percent to help finance a new playground facility in Chicago. This year the cost of debt is 15 percent higher; that is, firms that paid 10 percent for debt last year would be paying 11.5 percent this year a. If the Millennium Charitable Foundation borrowed money this year, what would the aftertax cost of debt be, based on their cost last year and the 15 percent increase? b. If the Foundation was found to be taxable by the irS (at a rate of 35 percent) because it was involved in political activities, what would the aftertax cost of debt be? Solution: Millennium Charitable foundati K Yield(1-T Yield=8%X1.15=9.20% K 92%(1-0)=9.2%(1)=9.2% b K 92%(1-35)=92%(65)=5.98% CopyrightC 2005 by The McGray-Hill Companies, Inc.Copyright © 2005 by The McGraw-Hill Companies, Inc. S-384 11-3. Calculate the aftertax cost of debt under each of the following conditions. Yield Corporate Tax Rate a. 8.0% 18% b. 12.0% 34% c. 10.6% 15% Solution: Kd = Yield (1 – T) Yield (1 – T) Yield (1 – T) a. 8.0% (1 – .18) 6.56% b. 12.0% (1 – .34) 7.92% c. 10.6% (1 – .15) 9.01% 11-4. The Millennium Charitable Foundation, which is tax-exempt, issued debt last year at 8 percent to help finance a new playground facility in Chicago. This year the cost of debt is 15 percent higher; that is, firms that paid 10 percent for debt last year would be paying 11.5 percent this year. a. If the Millennium Charitable Foundation borrowed money this year, what would the aftertax cost of debt be, based on their cost last year and the 15 percent increase? b. If the Foundation was found to be taxable by the IRS (at a rate of 35 percent) because it was involved in political activities, what would the aftertax cost of debt be? Solution: Millennium Charitable Foundation a. Kd = Yield (1 – T) Yield = 8% x 1.15 = 9.20% Kd = 9.2% (1 – 0) = 9.2% (1) = 9.2% b. Kd = 9.2% (1 – 35) = 9.2% (65) = 5.98%