Question

Rappaport Industries has 5,950 perpetual bonds outstanding with a face value of $2,000 each. The bonds...

Rappaport Industries has 5,950 perpetual bonds outstanding with a face value of $2,000 each. The bonds have a coupon rate of 6.2 percent and a yield to maturity of 6.5 percent. The tax rate is 40 percent. What is the present value of the interest tax shield?

Homework Answers

Answer #1

Interest payment per perpetual bond per year = Face value * Coupon rate

Interest payment per perpetual bond per year = $2000*0.062 = $124

Total Interest payment per year = 5950*124 = $737,800

Total tax-shield per year = Total Interest payment per year* Tax rate

Total tax-shield per year = $737,800*0.4 = $295,120

PV of interest tax shield = Total tax-shield per year / Yield to maturity

PV of interest tax shield = 295,120/0.065

PV of interest tax shield = $4,540,307.69

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Rappaport Industries has 5,650 perpetual bonds outstanding with a face value of $2,000 each. The bonds...
Rappaport Industries has 5,650 perpetual bonds outstanding with a face value of $2,000 each. The bonds have a coupon rate of 6.4 percent and a yield to maturity of 6.7 percent. The tax rate is 35 percent. What is the present value of the interest tax shield? Debbie's Cookies has a return on assets of 8.1 percent and a cost of equity of 12.5 percent. What is the pretax cost of debt if the debt–equity ratio is .87? Ignore taxes....
Models and More has a bond issue outstanding with a face value of $215,000. These bonds...
Models and More has a bond issue outstanding with a face value of $215,000. These bonds have a coupon rate of 5.65 percent, pay interest semiannually, and have a current market price quote of 1.01. The tax rate is 34 percent. What is the amount of the annual interest tax shield?
AB Builders, Inc., has 24-year bonds outstanding with a par value of $2,000 and a quoted...
AB Builders, Inc., has 24-year bonds outstanding with a par value of $2,000 and a quoted price of 98.145. The bonds pay interest semiannually and have a yield to maturity of 6.86 percent. What is the coupon rate?
Patch Inc. has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in 6...
Patch Inc. has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in 6 years, and have a 9 percent coupon. The current price is $1,110. What is the yield to maturity? 6.74 percent 7.90 percent 4.39 percent 3.37 percent
CAN YOU PLEASE DO THESE IN EXCEL Global Trade, Inc. has $1,000 face value bonds outstanding...
CAN YOU PLEASE DO THESE IN EXCEL Global Trade, Inc. has $1,000 face value bonds outstanding with a market price of $1,013. The bonds pay interest annually, mature in 11 years, and have a yield to maturity of 5.34 percent. What is the current yield? 5.39 percent 5.43 percent 5.50 percent 5.61 percent 5.77 percent Best Lodging has $1,000 face value bonds outstanding. These bonds pay interest semiannually, mature in 5 years, and have a 6 percent coupon. The current...
Apisco Tiger Inc. has 66,000 bonds outstanding that are selling at par. The face value of...
Apisco Tiger Inc. has 66,000 bonds outstanding that are selling at par. The face value of each bond is $1,000. Bonds with similar characteristics have yield to maturity of 6.5 percent. The company also has 600,000 shares of preferred stock and 2.5 million shares of common stock outstanding. The preferred stock sells for $40 a share and pays annual dividends of $3.20 per share. The common stock has beta of 1.25 and sells for $44 a share. The risk free...
worldwide enterprises has outstanding bonds with a face value of 1000 expiring in 17years at a...
worldwide enterprises has outstanding bonds with a face value of 1000 expiring in 17years at a coupon rate of 9.8 percent. The bonds make semiannual payments. The yield to maturity on the bonds is 9.2 percent. What is the current bond price? 1098 1051.08 951.27 1042.16 1089.02
Bonita Limited has bonds outstanding that will mature in 6 years. The bonds have a face...
Bonita Limited has bonds outstanding that will mature in 6 years. The bonds have a face value of $1,000. The bonds pay interest semi-annually and have a coupon rate of 4.6 percent. If the bonds are currently selling at $899.68. What is the yield to maturity that an investor who buys them today can expect to earn? (Round answer to 1 decimal place, e.g. 5.2%.) Yield to maturity% __________________ What is the effective annual yield? (Round answer to 2 decimal...
Chavez Industries, has an outstanding bond that has a $1000 face value and a 6.4% coupon...
Chavez Industries, has an outstanding bond that has a $1000 face value and a 6.4% coupon rate. Interest is paid semi-annually. The bond has 7 years remaining until it matures. Today the interest rate on similar risk bonds is 5.7% and it is expected to remain at this level for many years in the future. Compute the following: A). The bond’s current price B). The bond’s price one year from today C). The current yield the bond will generate this...
Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to...
Field Industries' outstanding bonds have a 25-year maturity and $1,000 par value. Their nominal yield to maturity is 9.25%, they pay interest semiannually, and they sell at a price of $950. What is the bond's nominal (annual) coupon interest rate?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT