Your firm currently has $116 million in debt outstanding with a 9% interest rate. The terms...

Your firm currently has $116 million in debt outstanding with a 9% interest rate. The terms of the loan require the firm to pay $29 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 shields from this debt?

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Expert Solution

Solution :

The Present value of the interest shields from this debt for Year 1 = $ 3,831,192.66

= $ 3,831,193 ( when rounded off to the nearest whole number )

The Present value of the interest shields from this debt for Year 2 = $ 2,636,141.74

= $ 2,636,142 ( when rounded off to the nearest whole number )

The Present value of the interest shields from this debt for Year 3 = $ 1,612,319.11

= $ 1,612,319 ( when rounded off to the nearest whole number )

The Present value of the interest shields from this debt for Year 4 = $ 739,595.92

= $ 739,596 ( when rounded off to the nearest whole number )

Please find the attached screenshot of the excel sheet containing the detailed calculation for the solution.

jeff jeffy answered 1 year ago

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