A Firm Has 3,500 Bonds Outstanding with a Face Value

question 7

Multiple Choice

A firm has 3,500 bonds outstanding with a face value of $1,000 each and a coupon rate of 8.5%.The interest is paid semi-annually.What is the amount of the annual interest tax shield if the tax rate is 40%?

• A)$81,600
• B)$90,100
• C)$101,200
• D)$119,000
• E)$122,000

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Definitions:

Economic Profit

The financial gain achieved by a firm or individual after deducting both explicit (direct) and implicit (indirect, such as opportunity costs) costs from total revenues.

Investment

Committing funds to assets with the goal of earning returns over time.

Interest Rate

The percentage charged on the total amount borrowed or earned on investments, representing the cost of borrowing or the gain on saved or invested money.

Capital Market

Refers to financial markets where long-term debt or equity-backed securities are bought and sold.