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

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Definitions:

Medicare Taxes

Taxes deducted from earnings to fund the Medicare program, which provides healthcare benefits to eligible elderly and disabled individuals.

Withholding Allowances

A taxpayer's claim that reduces the amount of money that an employer deducts from their paycheck for taxes, based on personal or dependant status.

Withholding Allowances

Deductions allowed on a paycheck, used to be calculated to reduce the amount of income tax withheld from an employee's salary.

FUTA Taxes

Federal Unemployment Tax Act taxes, which are payroll taxes paid by employers to fund the unemployment insurance system.