The Goodsmith Charitable Foundation, which is tax-exempt, issued debt last year at 8 percent to help finance a new playground facility in Los Angeles. This year the cost of debt is 20 percent higher; that is, firms that paid 10 percent for debt last year will be paying 12 percent this year.
a. If the Goodsmith Charitable Foundation borrowed money this year, what would the after-tax cost of debt be, based on its cost last year and the 20 percent increase?
b. If the receipts of the foundation were found to be taxable by the IRS (at a rate of 35 percent because of involvement in political activities), what would the after-tax cost of the debt be?