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Stuart Inc has just issued a perpetual bond.The annual coupon is 8% and nominal value is £15 million. The firm will pay interest only on this debt. The marginal tax rate is 30%.
Problem a. If the bond sells for an amount equal to the nominal value, what is the yield on debt?
Problem b. What is the present value of the interest tax shield?
Problem c. If the annual coupon on the debt was 7% and it sold at a price equal to the nominal value, what would the present value of the interest tax shield have been in this case?
10 years later, interest rates have dropped so that the yield on Camden's bond is currently 4%.
Problem d. What is the company's annual interest tax shield now?
Problem e. What is the present value of the interest tax shield today?
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