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30 January, 06:27

D. L. Tuckers has $48,000 of debt outstanding that is selling at par and has a coupon rate of 6.75 percent. The tax rate is 35 percent. What is the present value of the tax shield? (A) $1,134 (B) $3,240 (C) $16,800 (D) $2,106

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  1. 30 January, 07:14
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    option (c) $16,800

    Explanation:

    Data provided:

    Outstanding debt = $48,000

    Coupon rate = 6.75%

    The tax rate = 35%

    Now,

    The present value of tax shield is calculated as:

    Value of tax shield = Outstanding debt * tax rate

    on substituting the respective values, we have

    Value of tax shield = $48,000 * 0.35

    or

    Value of tax shield = $16,800

    Hence, the correct answer is option (c) $16,800
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