Question

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp. if it goes through with the debt issuance?

Answer 1

The annual interest tax shield to Salinas Corp would be of $560,000

Explanation:

In order to calculate the annual interest tax shield to Salinas Corp if it goes through with the debt issuance we would have to calculate the following formula:

Annual Interest tax shield = Interest * tax

Interest = debt *rate of interest

Interest=$20 million * 0.07

Interest= $ 1.40 million

tax= 40%

Therefore, Annual Interest tax shield =$1.40 million * 0.40

Annual Interest tax shield = $560,000

The annual interest tax shield to Salinas Corp would be of $560,000