Laurentide Ski Resort Has to Make a Choice Between Two

question 22

Multiple Choice

Laurentide Ski Resort has to make a choice between two different debt issues.Issue 1 has an interest rate of 5% and the interest is tax deductible.Issue 2 has an interest rate of 4% but the interest is not tax deductible.If the firm has a tax rate of 40%,which issue is preferred and why?

• A) Issue 2 because the interest rate of 4% is less than the 5% of issue 1.
• B) Issue 1 because the after-tax cost is 3% while the after-tax cost of issue 2 is 4%
• C) Issue 1 because the after-tax cost is 2% while the after-tax cost of issue 2 is 4%
• D) Issue 2 because the after-tax cost is 1.6% while the after-tax cost of Issue 1 is 2%

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