The management of Graphicopy is trying to determine how much debt they should have in their capital structure. If they sell $500,000 in perpetual bonds with a 9% coupon, what would be the present value of the tax shield? Assume the marginal tax rate is 35%.
A) $18,750
B) $29,250
C) $175,000
D) $45,000

Question

Quizplus · Accepted Answer

The present value of the tax shield is calculated as the amount of debt ($500,000) multiplied by the marginal tax rate (35%), which equals $175,000.

The Management of Graphicopy Is Trying to Determine How Much