A firm issues a $100 million bond with a coupon rate of 8%. If the firm pays taxes at the marginal rate of 38%, what is the present value of the tax savings on the debt, assuming the
Debt is perpetual?

Question

Quizplus · Accepted Answer

The present value of the tax shield on perpetual debt is calculated as the tax rate multiplied by the debt amount. Here, it is 38% of $100 million, which equals $38 million.

A Firm Issues a $100 Million Bond with a Coupon