Solution: Interest Tax Shield is the saving in the taxes due to the presence of debt which leads to a reduction in the income due to interest payments.
Interest Tax Shield for a year = Interest Rate*Tax Rate*Debt amount = KD*T*D
Interest Rate (Kd) = 7%
Tax Rate (T) = 21%
Debt Amount (D) = $10,000,000
Hence, Interest Tax Shield for a year = 7%*21%*10,000,000 = 147,000
Since debt is perpetual in nature, hence, Interest Tax Shield will be provided each year, assuming the tax rate and interest rate remains same
Present Value of a interest tax shield due to perpetual debt, PV(TS) = T*Kd*D/Kd = T*D
PV(TS) = 21%*10,000,000 = 2,100,000
Thus, Present Value of a interest tax shield due to perpetual debt = $2,100,000
Hence, the answer is (D)
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