Jasmine's Boutique has 2,000 bonds outstanding with a face value of $1,000 each,a market value of $1,060 each,and a coupon rate of 9 percent.The interest is paid semiannually.What is the amount of the annual tax shield on debt if the tax rate is 23 percent?
A)$44,872
B)$460,000
C)$43,884
D)$41,400
E)$487,600

Question

Quizplus · Accepted Answer

The annual tax shield on debt is calculated as the interest expense multiplied by the tax rate. The annual interest expense is the coupon rate (9%) times the face value of the bonds ($1,000) times the number of bonds (2,000). This gives $180,000. The tax shield is then $180,000 * 23% = $41,400.

Jasmine's Boutique Has 2,000 Bonds Outstanding with a Face Value