Question

A company has $5 million in debt outstanding with a coupon rate of 12%. Currently the...

A company has $5 million in debt outstanding with a coupon rate of 12%. Currently the YTM on these bonds is 14%. Suppose the firm’s tax rate is 40%.

The bond could provide the firm a total of ___________ interest tax shield.

A.

$ 600,000
B.

$ 240,000
C.

$ 280,000
D.

$ 700,000
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Homework Answers

Answer #1

As per the details given in the information-
Correct Answer is option C
Company issue debt because its interest is tax deductible
YTM of the bond = 14%
Interest of the bond = 5000000*14%
Interest of the bond = 700000
Tax on the bond = 700000*40%
Tax on the bond = 280000
Firm total interest tax sheild = 280000

I hope this clear your doubt.

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