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 25%, while its average tax rate is 15%. By how much will this debt issuance reduce the firm's annual tax liability?
A) $13,500
B) $22,500
C) $32,500
D) None of the above

Question

Quizplus · Accepted Answer

The interest expense is $1,000,000 * 9% = $90,000. The tax shield is $90,000 * 25% = $22,500.

A Firm Plans to Issue $1 Million Worth of Debt