Alpha Semiconductor has taken out a loan for $632,362. They will make yearly interest payments at...

Alpha Semiconductor has taken out a loan for $632,362. They will make yearly interest payments at 0.06 for the next 23 years and then repay the principal. If their tax rate is 0.28, how much does this loan increase their firm value by?

The answer is 130,707.18

How did they get that?

Solutions

Expert Solution

r = interest rate = 6%

n = 23 years

P = Yearly Interest tax sheild = Loan amount * Interest rate * Tax rate = $632,362 * 6% * 0.28 = $10,623.6816

Present Value of Interest tax shield = P * [ 1 - (1+r)^-n] / r

= $10,623.6816 * [1 - (1+6%)^-23] / 6%

= $10,623.6816 * 0.738202739 / 0.06

= $130,707.181

Therefore, this increase the firm value by interest tax shield i.e. $130,707.18

jeff jeffy answered 2 years ago

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