Question

Southern Foods has a $13 million bond issue outstanding with a coupon rate of 7.15 percent and a yield to maturity of 7.39 percent. What is the present value of the tax shield if the tax rate is 34 percent?

$283,140

$316,030

$4,053,400

$3,960,000

$4,420,000

Answer 1

Solution The values provided in the question are as follows! Bond issue outstanding or Pest value, $10 million OR13009000 > coupon Rate or interest Ralē = 7:15% OR 0.0715 CYTM) Yield to Matunity = 7.39%, OR 0.0739 (t) Tax Rale = 34% OR 0.34 Demand Question: tax Shield of of Present Valle Rate Calculation of Present value of taxshield Present value of tax shield = Debtvolle * Tax Ralett) x coupon coupon Rale Using the values, Present value of tox Shield = $13,009000 X 0.34% 0.0715 0.0715 Presentralue of tax Shield tax Shield = $4,420,000 option'e will be correct