Asked by Alexia Salcedo on Jun 25, 2024
Verified
Juanita's Steak House has $12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield?
A) $2,823
B) $2,887
C) $4,080
D) $4,500
E) $4,633
Tax Shield
The reduction in income taxes that results from taking an allowable deduction from taxable income, such as mortgage interest or depreciation.
Coupon Rate
Yearly rate of interest paid on a bond, expressed in terms of percentage of its face value.
- Acquire knowledge on the theory of an annual interest tax shield and learn the calculation process.
Verified Answer
ZK
Zybrea KnightJul 01, 2024
Final Answer :
C
Explanation :
The formula for the present value of tax shield is:
PV of tax shield = TC x D
where TC is the tax rate and D is the amount of debt outstanding.
In this case, TC = 0.34 and D = $12,000.
PV of tax shield = 0.34 x $12,000
PV of tax shield = $4,080
Therefore, choice C ($4,080) is the correct answer.
PV of tax shield = TC x D
where TC is the tax rate and D is the amount of debt outstanding.
In this case, TC = 0.34 and D = $12,000.
PV of tax shield = 0.34 x $12,000
PV of tax shield = $4,080
Therefore, choice C ($4,080) is the correct answer.
Learning Objectives
- Acquire knowledge on the theory of an annual interest tax shield and learn the calculation process.