ACCA FM · Chapter 11 · Question 10 of 11
A company has a bank loan with an interest rate of 7% a year. Corporation tax is 20%. What is the after-tax cost of the bank loan?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) 5.6%
Explanation
A bank loan is not traded, so its cost is based on the interest rate. Because interest is tax deductible, the after-tax cost = 7% x (1 - 0.20) = 5.6%. 1.4% is the value of the tax relief, not the cost.
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