Juanita's Steak House has $12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield?
A) $2,823
B) $2,887
C) $4,080
D) $4,500
E) $4,633

Question

Quizplus · Accepted Answer

The present value of the tax shield can be calculated using the formula PVTS = TC x D, where PVTS is the present value of the tax shield, TC is the corporate tax rate, and D is the amount of debt. In this case, TC is 34%, and D is $12,000. Therefore, PVTS = 0.34 x $12,000 = $4,080. Choice C is the correct answer.

Juanita's Steak House Has $12,000 of Debt Outstanding That Is