(Cost of borrowing, LO 3) For each of the following situations, determine the entity’s after-tax cost of borrowing:

a. A corporation has a $1,000,000 bond with a coupon rate of 10%. The corporation has a tax rate of 38%.

b. A small business has a three-year, $100,000, 6% note payable with a supplier.

The small business has a tax rate of 20%.

c. A not-for-profit organization, which does not have to pay tax, has a $25,000 bank loan at the prime lending rate plus 2%. For the year just ended the prime lending rate was 6.5%.

d. What is the relationship between an entity’s tax rate and its after-tax cost of borrowing? Is it more desirable for an entity to have a higher tax rate so that it can lower its after-tax cost of borrowing? Explain.