After-tax cost of debt and the before-tax cost

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Reference no: EM131883141

1. Hendrix Malmsteen Corp. (HMC) owns 20% in Van Vai Vaughan Corp. (VVV). VVV reported earnings of $50 million in 2016. The 20% ownership stake allows for significant influence in VVV. Should HMC record anything in its own income statement to reflect this ownership? If so, what amount and what is the method of recording called? If not, why not? Assume US GAAP to answer this question.

Yes; $50 million; Consolidated Method

Yes: $10 million; Proportional Consolidation Method

No; because the ownership stake is not greater than 50%

Yes; $10 million; Equity Method

2. What is the relationship between the after-tax cost of debt and the before-tax cost?

a-The after-tax cost of debt is more than the before-tax cost

b-The after-tax cost of debt is less than the before-tax cost of debt

c-The after-tax cost of debt is equal to the before-tax cost of debt

d-It depends on the firm. Sometimes the after-tax is more than the before-tax cost and sometimes less

Reference no: EM131883141

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