Question

Company A has $9328251 in permanent debt outstanding. The firm will pay interest only on this debt. The firm's marginal tax rate is expected to be 39% for the foreseeable future. Suppose that the firm pays interest of 5.04% per year on its debt. What is the present value of the interest tax shield, assuming its risk is the same as the loan?

Answer 1

The present value of the interest tax shield for Company A can be calculated using the formula: Present Value = Tax Rate x Debt x Interest Rate.

Step-by-step explanation:

The present value of the interest tax shield can be calculated using the formula:

Present Value = Tax Rate x Debt x Interest Rate

Given that the firm's permanent debt outstanding is $9,328,251 and the interest rate is 5.04%, we can calculate:

Present Value = 0.39 x 9,328,251 x 0.0504

Therefore, the present value of the interest tax shield is approximately $182,019.37.