Question

Sundance Motor Lodge has 5600 bonds outstanding with a face value of $1,000 each and a coupon rate of 6.7 percent. The interest is paid semi-annually. What is the present value of the interest tax shield if the tax rate is 32 percent? (That is, how much does the tax shield add to the value of the firm?)

Answer 1

$1,792,000

Step-by-step explanation:

The computation of the present value of the interest tax shield is shown below:

= Number of bonds outstanding × face value × tax rate

= 5,600 bonds × $1,000 × 32%

= $1,792,000

We simply multiply the number of bonds outstanding with the face value and the tax rate so that the correct amount can come.

All other information which is given is not relevant. Hence, ignored it