Your ﬁrm has a $475,000 bond issue outstanding. These bonds have a 7.5% coupon, pay interest semi-annually, and have a current market price equal to 99.6% of face value. What is the amount of
The annual interest tax shield given a tax rate of 34%?
A) $12,064
B) $12,087
C) $12,113
D) $23,418
E) $23,513

Question

Quizplus · Accepted Answer

First, calculate the amount of the bond issue outstanding:
$475,000

Next, calculate the current market price of the bond:
0.996 x $475,000 = $472,700

Then, calculate the annual coupon payment:
($475,000 x 0.075) = $35,625

Since the coupon payment is paid semi-annually, each payment is half the annual payment:
$35,625 / 2 = $17,812.5

Next, calculate the annual interest tax shield:
$17,812.5 x 0.34 = $6,059.25

Finally, round the answer to the nearest dollar:
$6,059

Your ﬁRm Has a $475,000 Bond Issue Outstanding