Question

Your firm currently has $108 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $27 million of the balance each year. Suppose that the marginal corporate tax rate is 30%, and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt?

The present value of the interest tax shields is  ​(Round to two decimal​ places.) ​

Answer 1

Amount of Interest in first year = 108*10% = 10.80
Amount of interest in second year = (108-27)*10% = 8.1
Amount of interest in third year = (108-27*2)*10% =5.4
Amount of interest in fourth year = (108-27*3)*10% = 2.7

PV of Interest Tax Shield = Interest year 1*Tax Rate/(1+Rate )+Interest year 2*Tax Rate/(1+Rate )^2+Interest year 3*Tax Rate/(1+Rate )^3+Interest year 4*Tax Rate/(1+Rate )^4 =( 10.80/(1+10%) +8.1/(1+10%)^2+5.4/(1+10%)^3+2.7/1(1+10%)^4 )*30%= 6.72

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