Exhibit 7A.1 Gargoyle Unlimited Is Planning to Issue a Zero Coupon Bond

question 1

Multiple Choice

Exhibit 7A.1
Gargoyle Unlimited is planning to issue a zero coupon bond to fund a project that will yield its first positive cash flow in 3 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%.
-Refer to Exhibit 7A.1.What is the nominal dollar value of the interest tax savings to the firm in the third year of the issue?

• A)$38.27
• B)$40.29
• C)$42.30
• D)$44.42
• E)$46.64