A firm plans to issue $1 million worth of debt at an YTM of 9%. The debt is trading at par. The firm's marginal corporate tax rate is 35%. What is the present value of the tax savings if the debt never matures?
A) $11,025
B) $20,475
C) $350,000
D) $227,500

Question

Quizplus · Accepted Answer

The present value of the tax savings from debt is calculated as the tax rate multiplied by the amount of debt, since the debt is perpetual. Therefore, it is 35% of $1 million, which equals $350,000.

A Firm Plans to Issue $1 Million Worth of Debt