Question

Lyme Home has 5,000 bonds outstanding with a face value of $1,000 each and a coupon rate of 7.65 percent. Interest is paid semiannually. What is the amount of the annual tax shield on debt if the tax rate is 23 percent

Answer 1

if the tax rate is 23%, the amount of the annual tax shield on debt will be $87,975.

Total Interest = Total Bonds * Face Value * Coupon Rate

Total Interest = (5,000 bonds*$ 1,000) * 7.65%

Total Interest = $5,000,000 * 7.65%

Total Interest = $ 382,500

Annual Tax Shield =Total Interest * Tax Rate

Annual Tax Shield = $382,500*23%

Annual Tax Shield = $87,975

In conclusion, if the tax rate is 23%, the amount of the annual tax shield on debt is $87,975.

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