1. Tom’s Kitchen has a $200,000 annual-coupon bond issue outstanding. The bond has a 6 percent coupon rate. The corporate tax rate is 35 percent. What is the amount of the annual interest tax shield?
A. $1,500
B. $2,100
C. $3,500
D. $4,200
E. $4,900
2. Auto Heating Corp. has expected earnings before interest and taxes (EBIT) of $100,000, an unlevered cost of capital of 15 percent. Now, the firm is considering to increase its leverage by issuing a debt of $200,000 to repurchase the stocks. The corporate tax rate is 40 percent. What is the value of the firm after leverage?
A. $350,000
B. $412,250
C. $480,000
D. $525,000
E. $550,250