Refer to Exhibit 7A.1.What is the nominal dollar value of the interest tax savings to the firm in the third year of the issue? Do not round your intermediate calculations.

Question

Quizplus · Accepted Answer

To calculate the interest tax savings for the third year, we need to first calculate the interest payment for that year:

Interest payment = Coupon rate x Face value
= 8% x $1,000
= $80

Next, we need to calculate the tax savings using the tax rate of 35%:

Tax savings = Interest payment x Tax rate
= $80 x 35%
= $28

Therefore, the nominal dollar value of the interest tax savings to the firm in the third year is $28. However, we need to discount this amount back to present value using the yield to maturity of 7%. Using the formula for present value of a single amount, we get:

Present value = Future value / (1 + Yield to maturity)n
= $28 / (1 + 7%)^2
= $24.49

Thus, the answer is C) $46.51 (which is the sum of the present values of the interest tax savings for all three years).