Question

Assuming that Amazon’s $6 billion debt is not perpetual, and that the corporate tax rate is 35%. Given the bonds’ interest rates, how much value does Amazon’s $6billion debt add to the firm? In other words, what is the present value of the tax shield generated by the debt issuance? Note: The $6 billion offering has 5 parts, so you need to compute a present value of tax shield for each part.

Answer 1

In order to calculate the present value of tax shield, we need to calculate annual interest paid and tax savings over the life of the loan and compute its present value given the interest rate.

Let me show you an example. Assume it $1,000,000 in loan currently on which it pays 5% interest and will repay $200,000 in principal each year.

Tax Saving = Tax Rate x Interest Paid

PV = Tax Saving / (1 + r)^n, where r = 5%

Year	Loan	Interest	Principal	Tax Saving	PV
1	1,000,000	50000	200,000	17,500	16,667
2	800,000	40000	200,000	14,000	12,698
3	600,000	30000	200,000	10,500	9,070
4	400,000	20000	200,000	7,000	5,759
5	200,000	10000	200,000	3,500	2,742
				Total PV	46,937