A firm has $60,000 of debt outstanding that is selling at par and has a coupon rate of 8%.The tax rate is 40%.What is the present value of the tax shield?
A)$1,760
B)$4,400
C)$24,000
D)$33,000
E)$60,000

Question

Quizplus · Accepted Answer

The present value of the tax shield can be calculated using the formula:

PV(Tax Shield) = TC x D

where TC is the corporate tax rate and D is the amount of debt.

In this case, TC = 40% and D = $60,000. Plugging in the values, we get:

PV(Tax Shield) = 0.40 x $60,000 = $24,000

Therefore, the present value of the tax shield is $24,000. Option C is the correct answer.

A Firm Has $60,000 of Debt Outstanding That Is Selling