We appreciate your visit to Debt investors for Honeywell demand a return of 3 3 Honeywell s corporate tax rate is 30 and the average personal tax rate is 22. This page offers clear insights and highlights the essential aspects of the topic. Our goal is to provide a helpful and engaging learning experience. Explore the content and find the answers you need!
Answer :
The effective cost of debt of Honeywell is 1.80%.
The effective cost of debt is the interest rate that has been payed by an organization to the debt taken.
The effective cost of debt for the Honeywell is calculated as:
[tex]\rm Effective\;cost\;of\;debt=Weighted\;average\;tax\;rate\;\times\;(1-tax\;rate)[/tex]
The weighted average tax rate is calculated as:
[tex]\rm Weighted \;average \;tax \;rate = (Corporate\;tax\;rate\;\times\;(1-Personal\;tax\;rate)+Personal\;tax\;rate)\\Weighted \;average \;tax \;rate = 0.30x(1-0.22)+0.22\\Weighted \;average \;tax \;rate = 0.454[/tex]
The effective cost of debt is:
Effective cost of debt = 3.3 × (1-0.454)
Effective cost of debt = 0.018
Effective cost of debt = 1.80%
The effective cost of debt is 1.80%.
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Final answer:
Honeywell's effective cost of debt is calculated by taking the interest rate demanded by debt investors and adjusting it for the corporate tax rate, resulting in 2.31%.
Explanation:
The student is asking about the effective cost of debt for Honeywell, given that debt investors demand a return of 3.3%, Honeywell's corporate tax rate is 30%, and assuming the average personal tax rate is 22%. The effective cost of debt is the after-tax cost to the company for borrowing funds. To calculate this, we can use the formula: Effective Cost of Debt = Interest Rate x (1 - Corporate Tax Rate). Applying the given numbers, the calculation would be 3.3% x (1 - 0.30), which equals 2.31%. Thus, the effective cost of debt for Honeywell would be 2.31%.
