Question

Braxton Enterprises currently has debt outstanding of $50 million and an interest rate of 7%. Braxton plans to reduce its debt by repaying $10 million in principal at the end of each year for the next five years. If Braxton's marginal corporate tax rate is 30%, what is the interest tax shield from Braxton's debt in each of the next five years?

Answer 1

Solution :

The Interest Tax shield from Braxton's debt in each of the next five years is

Year 1 = $ 1,050,000 ; Year 2 = $ 840,000

Year 3 = $ 630,000 ; Year 4 = $ 420,000

Year 5 = $ 210,000

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

28.11.2019 Microsoft Excel INSERT VIEW FILE НОМE PAGE LAYOUT FORMULAS DATA REVIEW A B D G Н J 1 Statement showing calculation of Interest Tax shield from Year 1 to Year 5 2 SI.No. Year Balance of Debt at the Repayment of Debt During the year (2) Balance of Debt at the Interest@ 7% end of the Year (3) Interest Tax shield beginning of the Year (4) (1) 7% @ 30% (5) (4) 30 % (1) 3 1 $ 2 $ 3 $ 50,000,000.00 $ 10,000,000.00 $ 10,000,000.00 $ 10,000,000.00 $ 10,000,000.00 $ 10,000,000.00 $ Total of Interest Tax shield from year 1 to year 5 SUM(H4:H8) 40,000,000.00 $ 3,500,000.00 $ 4 1 1,050,000.00 30,000,000.00 $ 20,000,000.00 $ 10,000,000.00 $ $ 40,000,000.00 $ 30,000,000.00 $ 2,800,000.00 $ 840,000.00 5 2 2,100,000.00 $ 630,000.00 6 4S 20,000,000.00 $ 7 4 1,400,000.00 420,000.00 10,000,000.00 $ 5 $ 700,000.00 $ 8 5 210,000.00 $ 6 3,150,000.00 10 11 12 13 14