Question

Your firm has a bond issue with a face value of $250,000 outstanding. These bonds have a coupon rate of 7 percent, pay interest semiannually, and have a current market price equal to 103 percent of face value. What is the amount of the annual tax shield on debt given a tax rate of 21 percent

Answer 1

$3,675

Step-by-step explanation:

Calculation to determine the amount of the annual interest tax shield

Using this formula

Annual interest tax shield=Outstanding face value*Coupon rate*Tax rate

Let plug in the formula

Annual interest tax shield = $250,000 *.07 *.21

Annual interest tax shield= $3,675

Therefore the amount of the annual interest tax shield is $3,675