1Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon

Question

1Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon of 7%. Wyatt will pay interest only on this debt. Wyatt's marginal tax rate is expected to be 40% for the foreseeable future. Wyatt's annual interest tax shield is closest to:

A$2.8million B$4.2million C$7.0million D$40million

2Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon of 7%. Wyatt will pay interest only on this debt. Wyatt's marginal tax rate is expected to be 40% for the foreseeable future.

The present value of Wyatt's annual interest tax shield is closest to

A$4.2million B$7.0million C$40million D$60million

3The idea that managers who perceive the firm's equity is under-priced will have a preference to fund investment using retained earnings, or debt, rather than equity is known as the:

A signaling theory of debt.

B lemons principle

C pecking order hypothesis

D credibility principle.

Explanation / Answer

a) Tax Shield = 100 *7% *40% = 2.8 million

B)

Tax Shield = 100 *7% *40% = 2.8 million

c)   A signaling theory of debt.

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