Establishment Industries borrows $840 million at an interest rate of 8.0%. Establishment will pay tax at...

Establishment Industries borrows $840 million at an interest rate of 8.0%. Establishment will pay tax at an effective rate of 21%. What is the present value of interest tax shields if: a. It expects to maintain this debt level into the far future? (Enter your answer in millions of dollars rounded to 1 decimal place.) b. It expects to repay the debt at the end of 6 years? (Do not round intermediate calculations. Enter your answer in millions of dollars rounded to 2 decimal places.) c. It expects to maintain a constant debt ratio once it borrows the $840 million and rAssets = 10%? (Do not round intermediate calculations. Enter your answer in millions of dollars rounded to 1 decimal place.).

Expert Solution

Establishment Industries borrows $840 million at an interest rate of 8.0%. Establishment will pay tax at an effective rate of 21%. What is the present value of interest tax shields if: a. It expects to maintain this debt level into the far future?

PV of Tax Shield = Debt Value * Tax Rate

PV of Tax Shield = $840 M * 21%

PV of Interest Tax Shield = $176.4 Million

b. It expects to repay the debt at the end of 6 years?

PV of Interest Tax Shield = Debt Value * Interest Rate * Tax Rate * PVAF(0.08,6)

PV of Interest Tax Shield = $840 M * 8% * 21% * 4.6229

PV of Interest Tax Shield = $65.24 Million

c. c. It expects to maintain a constant debt ratio once it borrows the $840 million and rAssets = 10%?

PV of Interest Tax Shield = Debt Value * Interest Rate * Tax Rate / Return on Assets

PV of Interest Tax Shield = $840 M * 8% * 21%/ 10%

PV of Interest Tax Shield = $141.1 Million

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jeff jeffy answered 1 year ago

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