medium · Investment Banking ma-lbo
If an acquirer's foregone interest on cash is 2.0% pre-tax and the cost of new debt is 6.0% pre-tax, which statement best describes the impact of using debt versus cash for an acquisition, assuming a 25% tax rate?
- Using debt is 4.0% more expensive because cash is considered 'free'
- Using debt is 4.5% more expensive because cash has no tax impact
- Both financing methods have the same impact on net income because they are both non-equity
- Using debt is 3.0% more expensive on an after-tax basis per dollar spent
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