Reena Industries has $10,000 of debt outstanding that is selling at par and has a coupon rate of 7%. The tax rate is 34%. What is the present value of the tax shield?
A) $2,800
B) $3,000
C) $3,400
D) $3,800
E) $7.000

Question

Quizplus · Accepted Answer

To calculate the present value of the tax shield, we need to find the interest tax shield, which is the amount of interest expense multiplied by the tax rate (i.e., 7% x 34% = 0.024).

Next, we need to discount this back to present value using the cost of debt, which is also 7%.

PV of tax shield = 0.024 x $10,000 / 0.07 = $3,428.57

Therefore, the answer is choice C, $3,400.

Reena Industries Has $10,000 of Debt Outstanding That Is Selling