Gargoyle Unlimited is planning to issue a zero coupon bond to fund a project that will yield its first positive cash flow in three years. That cash flow will be sufficient to pay off the entire debt issue. The bond’s par value will be $1,000, it will mature in 3 years, and it will sell in the market for $727.25. The firm’s marginal tax rate is 40 percent.
What is the nominal dollar value of the interest tax savings to the firm in the third year of the issue?
a. $ 32.58
b. $ 40.29
c. $100.72
d. $ 60.43
e. $109.10
Answer: B
What is the expected after-tax cost of this debt issue?
a. 11.20%
b. 4.48%
c. 6.72%
d. 6.10%
e. 4.00%
Answer: C
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