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Omega Corp. has $20 million in perpetual debt outstanding with a coupon rate of 8 percent. The tax rate is 21 percent. What is the tax shield from debt?Multiple choice question.$0$8 million$1.6 million$336,000

Question

Omega Corp. has 20millioninperpetualdebtoutstandingwithacouponrateof8percent.Thetaxrateis21percent.Whatisthetaxshieldfromdebt?Multiplechoicequestion.20 million in perpetual debt outstanding with a coupon rate of 8 percent. The tax rate is 21 percent. What is the tax shield from debt?Multiple choice question.08million8 million1.6 million$336,000

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Solution

The tax shield from debt is calculated by multiplying the interest expense by the tax rate.

Step 1: Calculate the annual interest expense. Omega Corp. has 20millioninperpetualdebtoutstandingwithacouponrateof8percent.So,theannualinterestexpenseis20 million in perpetual debt outstanding with a coupon rate of 8 percent. So, the annual interest expense is 20 million * 8% = $1.6 million.

Step 2: Calculate the tax shield. The tax shield is the amount of tax that is saved by deducting the interest expense. It is calculated by multiplying the interest expense by the tax rate. So, the tax shield is 1.6million∗211.6 million * 21% = 336,000.

So, the tax shield from debt is $336,000.

This problem has been solved

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