The June Bug has a $565,000 bond issue outstanding. These bonds have a coupon rate of 6.65 percent, pay interest semiannually, and sell at 98.7 percent of face value. The tax rate is 21 percent. What is the amount of the annual interest tax shield?
A) $7,573
B) $6,907
C) $8,333
D) $7,890
E) $8,250

Question

Quizplus · Accepted Answer

The annual interest tax shield is calculated as the interest expense multiplied by the tax rate. The interest expense is the bond's face value multiplied by the coupon rate. The face value is $565,000, and the coupon rate is 6.65%, so the annual interest is $565,000 * 6.65% = $37,572.50. The tax shield is $37,572.50 * 21% = $7,890.23, which rounds to $7,890.

The June Bug Has a $565,000 Bond Issue Outstanding