A firm issues a $200 million perpetual bond with a coupon rate of 7%. The firm's marginal tax rate is 35%. What is the present value of the tax savings on the debt?

Question

Quizplus · Accepted Answer

The present value of the tax savings on the debt is equal to the present value of the tax savings on the interest payments. The tax savings on the interest payments are equal to the interest payments multiplied by the marginal tax rate. The present value of the tax savings on the interest payments is equal to the present value of the interest payments multiplied by the marginal tax rate. The present value of the interest payments is equal to the face value of the bond multiplied by the coupon rate divided by the yield to maturity. The yield to maturity is equal to the coupon rate divided by the present value of the interest payments. The present value of the tax savings on the debt is equal to the face value of the bond multiplied by the coupon rate multiplied by the marginal tax rate divided by the yield to maturity. The yield to maturity is equal to the coupon rate divided by the present value of the interest payments. The present value of the tax savings on the debt is equal to the face value of the bond multiplied by the coupon rate multiplied by the marginal tax rate divided by the coupon rate. The present value of the tax savings on the debt is equal to the face value of the bond multiplied by the marginal tax rate. The present value of the tax savings on the debt is equal to $200 million multiplied by 0.35, which is $70 million.

A Firm Issues a $200 Million Perpetual Bond with a Coupon