Use the Following Information to Answer the Question(s) Below

question 84

Multiple Choice

Use the following information to answer the question(s) below.
Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon of 7%. Wyatt will pay interest only on this debt. Wyatt's marginal tax rate is expected to be 40% for the foreseeable future.
-Assuming its risk is the same as the loan,the present value of Wyatt's annual interest tax shield is closest to:

• A) $4.2 million
• B) $7.0 million
• C) $40 million
• D) $60 million

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Definitions:

Machine-hours

A measure of production activity that quantifies the total hours that machinery is in operation during a given period.

Manufacturing Overhead

All indirect costs related to the manufacturing process, including materials, labor, and expenses not directly tied to the production of goods.

Predetermined Overhead Rate

An estimated rate used to allocate manufacturing overhead to products based on a certain activity, like labor hours or machine hours.

Direct Labor-hours

The sum of working hours of employees directly engaged in producing goods.