Final answer:
To calculate the annual interest tax shield for a company with $9,328,251 in debt at a 6.31% interest rate and a 39% tax rate, multiply the annual interest payment by the tax rate. The result for Company A is $229,358.32.
Step-by-step explanation:
The student has asked how to calculate the annual interest tax shield for Company A, which has a permanent debt of $9,328,251 on which it pays 6.31% interest per year. The company's marginal tax rate is 39%.
The interest tax shield is a reduction in taxable income that results from being able to deduct interest payments. The formula to calculate the annual interest tax shield is: Interest Paid x Tax Rate. In this case, it's the annual interest (which is 6.31% of $9,328,251) multiplied by the tax rate (39%).
First, calculate the annual interest payment: 0.0631 x $9,328,251 = $588,098.26. Next, multiply the interest payment by the tax rate to find the interest tax shield: $588,098.26 x 0.39 = $229,358.32. Therefore, Company A's annual interest tax shield is $229,358.32.