For each of the following situations, determine the entity’s |

after-tax cost of borrowing: |

a. A corporation has a $2,500,000 bank loan with an interest rate of 4 percent. The corporation has a tax rate of 30 percent.

b. A small business has a three-year, $500,000, 5 percent note payable with a supplier.

The small business has a tax rate of 15 percent.

c. A charity, which doesn’t have to pay tax, has a $25,000 bank loan at the prime lending rate plus 2.5 percent. For the year just ended the prime lending rate was II 2.5 percent.

d. How is an entity’s after-tax cost of borrowing affected by its tax rate? 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.