Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon of 7%. Wyatt will pay interest only on this debt. Wyatt's corporate tax rate is expected to be 21% for the foreseeable future. The present value of Wyatt's annual interest tax shield is closest to $___________million.
Assume that five years have passed since Wyatt issued this debt. While tax rates have remained at 21%, interest rates have dropped so that Wyatt's current cost of debt capital is now only 4%. The present value of Wyatt's annual interest tax shield is now closest to $_________ million.
The present value is computed as shown below:
= ( Annual coupon rate x $ 100 million x tax rate ) / Annual coupon rate
= ( 7% x $ 100 million x 21% ) / 7%
= $ 21 million
So, the correct answer is option c
The present value is computed as shown below:
= ( Annual coupon rate x $ 100 million x tax rate ) / cost of debt capital
= ( 7% x $ 100 million x 21% ) / 4%
= $ 36.8 million Approximately
So, the correct answer is option b i.e. $ 36.8
Feel free to ask in case of any query relating to this question
Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon of 7%....
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