Boutelle Homes has 4,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 7%. The interest is paid semi-annually. What is the amount of the annual interest tax shield if the tax rate is 40%?
A) $58,000
B) $60,000
C) $72,000
D) $98,000
E) $112,000

Question

Quizplus · Accepted Answer

The annual interest payment is 4,000 bonds * $1,000 * 7% = $280,000. The tax shield is the interest payment multiplied by the tax rate: $280,000 * 40% = $112,000.

Boutelle Homes Has 4,000 Bonds Outstanding with a Face Value