Lyme Home has 5,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 7.65 percent.Interest is paid semiannually.What is the amount of the annual tax shield on debt if the tax rate is 23 percent?
A)$157,650
B)$160,125
C)$1,062,500
D)$1,150,000
E)$87,975

Question

Quizplus · Accepted Answer

First, we need to calculate the annual interest payment:

Coupon rate = 7.65%
Face value = $1,000
Semiannual interest payment = (7.65% / 2) * $1,000 = $38.25
Annual interest payment = 2 * $38.25 = $76.50

Next, we can calculate the amount of the tax shield:

Tax rate = 23%
Tax shield = $76.50 * 23% = $17.60

Finally, we can calculate the total annual tax shield on all 5,000 bonds:

Total tax shield = $17.60 * 5,000 = $87,975

Therefore, the correct answer is E.

Lyme Home Has 5,000 Bonds Outstanding with a Face Value