# Madoff Corporation raised money through a bond issue with a total principal value of $3,000,000.... ## Question: Madoff Corporation raised money through a bond issue with a total principal value of$3,000,000. Each bond has a face (par) value of $1,000 and a coupon rate of 6%. The company's applicable tax rate is 21%. a) What is the annual coupon payment bondholders expect to receive? b) What is total after-tax annual interest expense to the company? ## Interest Expense: Interest expense is a charge against the profits earned by a company during a fiscal period. It is computed by multiplying the face value of the debt with the coupon rate. For a company interest expense acts like a tax shield because it is tax-deductible thereby reducing the tax burden. Interest expense should be paid whether or not a company generates profits leading to high financial risk. ## Answer and Explanation: Answer: a) The annual coupon payment that is expected by the bondholders to be received is$180,000.

Explanation:

As per the data:

• Principal value = $3,000,000 • Coupon rate = 6% • Tax rate = 21% Computation: • Annual interest income = Principal value * Coupon rate • Annual interest income =$3,000,000 * 6%
• Annual interest income = $180,000 b) The total after-tax annual interest to the company will be$142,200.

Explanation:

• After-tax interest expense = Interest expense * (1 - Tax rate)
• After-tax interest expense = $180,000 * (1 - 0.21) • After-tax interest expense =$142,200

How to Calculate Interest Expense: Formula & Example

from Financial Accounting: Help and Review

Chapter 5 / Lesson 18
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