How Much Debt Is Outstanding If the Present Value of a Perpetual

question 19

Multiple Choice

How much debt is outstanding if the present value of a perpetual tax shield is $300,000,the tax rate is 35% and the interest rate on the debt is 10%?

• A) $300,000
• B) $857,143
• C) $3,000,000
• D) $3,750,000

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Definitions:

Exchange of Assets

Transactions where one asset is traded for another, typically without the use of cash, within the scope of business activities.

Commercial Substance

A transaction's capability to change the future cash flows of a business in a way that is measurable.

Old Machine

A piece of equipment that has been in use for a significant period and may be near or beyond its expected useful life.

Depletion

The allocation of the cost of a natural resource over its useful life as it is consumed or mined.