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The management of Graphicopy is trying to determine how much debt they should have in their...

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 percent coupon, what would be the present value of the tax shield? Assume the marginal tax rate is 35%.

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Answer #1

Tax shield is the reduction in income tax due to deductible expenses.

Present value of tax shield = coupon amount×tax rate
= 500000×9%×35%
= 15,5750.

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