Question

D. L. Tuckers has $48,000 of debt outstanding that is selling at par and has a coupon rate of 6.75 percent. The tax rate is 35 percent. What is the present value of the tax shield?(A) $1,134(B) $3,240(C) $16,800(D) $2,106

Answer 1

Answer:

option (c) $16,800

Explanation:

Data provided:

Outstanding debt = $48,000

Coupon rate = 6.75%

The tax rate = 35%

Now,

The present value of tax shield is calculated as:

Value of tax shield =  Outstanding debt  × tax rate

on substituting the respective values, we have

Value of tax shield = $48,000 × 0.35

or

Value of tax shield = $16,800

Hence, the correct answer is option (c) $16,800