Question

Your firm currently has $80 million in debt outstanding with a 9% interest rate. The terms of the loan require the firm to repay $20 million of the balance each year. Suppose that the marginal corporate tax rate is 40%​,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?

Answer 1

Present value is $ 3,193,176.52

Step-by-step explanation:

The calculation of the present value of interest rate tax shield is presented in the attachment that depicts the formula sheet and the final sheet

Provided that

Current amount = $80 million

Rate of interest = 9%

Repaid amount = $20 million

Corporate tax rate = 21%

Depend on the above information,

hence, the present value of the tax shield is $3,193,176.52