Question

Your firm currently has $84 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $21 million of the balance each year. Suppose that the marginal corporate tax rate is 21%, terest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt? The present value of the interest tax shields is $ million. (Round to two decimal places.)

Answer 1

Calculation of present value of tax shield is shown below
Year	Principal repaid	Loan balance	Interest	Tax shield	Discount factor @ 10%	Present value of tax shield
0		$84.00			1	$0.00
1	$21.00	$63.00	$8.40	$1.76	0.909091	$1.60
2	$21.00	$42.00	$6.30	$1.32	0.826446	$1.09
3	$21.00	$21.00	$4.20	$0.88	0.751315	$0.66
4	$21.00	$0.00	$2.10	$0.44	0.683013	$0.30
Total			$21.00	$4.41		$3.66
Thus, present value of the interest tax shields is $3.66 million.
Tax shield	Interest*Tax rate (21%)
Discount factor
1/(1.1^0)	1
1/(1.1^1)	0.909091
1/(1.1^2)	0.826446
1/(1.1^3)	0.751315
1/(1.1^4)	0.683013
Interest	Previous year ending loan balance*Interest rate (10%)
Present value of tax shield	Tax shield*Discount factor