Question

On January 1st 2015, DL Corp. signed a 5-year $30 million loan contract with Bank of Fisher with annual interest rate of 8%. The loan will be automatically rolled over unless either party opts out. The corporate tax rate is 35% till the end of 2017. Starting from January 1st 2018, the corporate tax rate is lowered to 21%. Assuming the lending relationship is stable, what is the present value on January 1st 2015 of the tax shield effect from the loan contract?

Please Help!

Answer 1

Year	Interest	Tax rates	Tax shield	Discounting Factor	Present Values
2015	2.4	35.00%	0.840	0.925925926	0.777777778
2016	2.4	35.00%	0.840	0.85733882	0.720164609
2017	2.4	35.00%	0.840	0.793832241	0.666819082
2018	2.4	21.00%	0.504	0.735029853	0.370455046
2019	2.4	21.00%	0.504	0.680583197	0.343013931
Total					2.878230446

It is assumed that the discount rate is the interest rate on the loan.

Discounting factor = 1 / ( 1 + r )^n

where r is the discount rate

n is the no years cash flow is away from year 0.