Your firm has a bond issue with a face value of $250,000 outstanding.These bonds have a coupon rate of 7 percent,pay interest semiannually,and have a current market price equal to 103 percent of face value.What is the amount of the annual tax shield on debt given a tax rate of 21 percent?
A)$3,675
B)$6,309
C)$4,500
D)$47,500
E)$52,500

Question

Quizplus · Accepted Answer

The annual interest payment on the bond is 7% of the face value, which is 0.07 * $250,000 = $17,500. The annual tax shield on this debt is the interest payment times the tax rate, which is $17,500 * 0.21 = $3,675.

Your Firm Has a Bond Issue with a Face Value