Gargoyle Unlimited Gargoyle Unlimited Is Planning to Issue a Zero Coupon Bond

question 32

Multiple Choice

Gargoyle Unlimited
Gargoyle Unlimited is planning to issue a zero coupon bond to fund a project that will yield its first positive cash flow in three years. That cash flow will be sufficient to pay off the entire debt issue. The bond's par value will be $1,000, it will mature in 3 years, and it will sell in the market for $727.25. The firm's marginal tax rate is 40 percent.
-Refer to Gargoyle Unlimited.What is the dollar value of the interest tax savings to the firm in the third year of the issue?

• A) $32.58
• B) $40.29
• C) $100.72
• D) $60.43
• E) $109.10

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Definitions:

Marginal Utility

Marginal utility is the additional satisfaction a consumer gains from consuming one more unit of a good or service.

Diminishing Marginal Utility

Diminishing marginal utility is an economic principle stating that as a person consumes more of a good or service, the satisfaction (utility) gained from each additional unit decreases.

Satisfaction

The feeling of pleasure or contentment arising from meeting one's needs, desires, or expectations.

Utility

A measure of satisfaction or benefit that a consumer receives from consuming goods and services.