Question

The June Bug has a $340,000 bond issue outstanding. These bonds have a coupon rate of 6.25 percent, pay interest semiannually, and sell at 101.2 percent of face value. The tax rate is 35 percent. What is the amount of the annual interest tax shield?

Answer 1

Answer:

the amount of the annual interest tax shield = $7437.5

Explanation:

First we need to ckeck the vaelus given on the problem.

$340,000 bond issue outstanding

rate of 6.25%

sell at 101.2% of face value

tax rate is 35 percent

pay interest semiannually

so the amount of the annual interest tax shield will be given by:

Coupon amount paid in a year = $340000 x 6.25 / 100 = $21250

 amount of the annual interest tax shield = $21250 x 35 / 100 = $7437.5

therefore we have that the amount of the annual interest tax shield is $7437.5