Suppose a project financed via an issue of debt requires five annual interest payments of $18...

Question

Question

Suppose a project financed via an issue of debt requires five annual interest payments of $18 million each year. If the tax r

business finance

Add a comment Improve this question Transcribed image text

Answer 1

Answer #1

Given,

Annual interest payment = $18 million

Number of annual payments (n) = 5

Tax rate = 30%

Cost of debt (r) = 5% or 0.05

Solution :-

Annual interest tax shield (A) = Annual interest payment x tax rate

= $18 million x 30% = $5.4 million

Now,

Value of interest rate tax shield

= A/r x [1 - (1 + r)^-n]

= $5.4 million/0.05 x [1 - (1 + 0.05)^-5]

= $108 million x [1 - (1.05)^-5]

= $108 million x [1 - 0.78352616646]

= $108 million x 0.21647383354

= $23.4 million

Add a comment

Answer 2

Similar Homework Help Questions

Avicorp has a $12.9 million debt issue outstanding, with a 5.9% coupon rate. The debt has semi-annual coupons, the next...

Avicorp has a $12.9 million debt issue outstanding, with a 5.9% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 95% of par value. a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? Note: Assume that the firm will always be able...
Avicorp has a million debt issue outstanding, with a coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at of par value. a. What is Avicorp's pre-tax cost

Avicorp has a $11.1 million debt issue outstanding, with a 5.9% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 93% of par value.a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return.b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt?Note: Assume that the firm will always be able to utilize its full interest tax shield.
Avicorp has a $ 14.9 million debt issue outstanding, with a 5.8 % coupon rate. The debt has semi-annual coupons, the n...

Avicorp has a $ 14.9 million debt issue outstanding, with a 5.8 % coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 93 % of par value. a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. b. If Avicorp faces a 40 % tax rate, what is its after-tax cost of debt? Note: Assume that the firm...

You are considering a project with an initial investment of $20 million and annual cash flow...

You are considering a project with an initial investment of $20 million and annual cash flow (before interest and taxes) of $5,000,000. The project’s cash flow is expected to continue forever. The tax rate is 34%, the firm’s unlevered cost of equity is 18% and its after-tax cost of debt is 6.60%. The only side-effect from the use of debt that you are concerned about is related to the tax shield. If the project were to be financed with 100%...
Avicorp has a $12.5 million debt issue outstanding, with a 6.1% coupon rate. The debt has...

Avicorp has a $12.5 million debt issue outstanding, with a 6.1% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 95% of par value. a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? Note: Assume that the firm will always be able...
Avicorp has a $10.5 million debt issue outstanding, with a 5.9% coupon rate. The debt has...

Avicorp has a $10.5 million debt issue outstanding, with a 5.9% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 94% of par value. a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? Note: Assume that the firm will always be able...

Avicorp has a $11.1 million debt issue outstanding, with a 6.1% coupon rate. The debt has...

Avicorp has a $11.1 million debt issue outstanding, with a 6.1% coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 94% of par value. a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. b. If Avicorp faces a 40% tax rate, what is its after-tax cost of debt? Note: Assume that the firm will always be able...
Avicorp has a $ 12.9$ million debt issue outstanding, with a 6.2 % coupon rate. The...

Avicorp has a $ 12.9$ million debt issue outstanding, with a 6.2 % coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 95 % of par value. a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. b. If Avicorp faces a 40 % tax rate, what is its after-tax cost of debt? Note: Assume that the firm...
Avicorp has a $ 10.3 million debt issue outstanding, with a 5.8 % coupon rate. The...

Avicorp has a $ 10.3 million debt issue outstanding, with a 5.8 % coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at 94 % of par value. a. What is Avicorp's pre-tax cost of debt? Note: Compute the effective annual return. b. If Avicorp faces a 40 % tax rate, what is its after-tax cost of debt? Note: Assume that the firm...

Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with an 8 percent interest...

Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with an 8 percent interest rate. The original principal amount was O A 531,000 OB. $30,000 O C. $20,000 OD. $25,000

Suppose a project financed via an issue of debt requires five annual interest payments of $18...

Homework Answers

Add Answer to:
Suppose a project financed via an issue of debt requires five annual interest payments of $18...

Post as a guest

Earn Coins

Avicorp has a $12.9 million debt issue outstanding, with a 5.9% coupon rate. The debt has semi-annual coupons, the next...

Avicorp has a million debt issue outstanding, with a coupon rate. The debt has semi-annual coupons, the next coupon is due in six months, and the debt matures in five years. It is currently priced at of par value. a. What is Avicorp's pre-tax cost

Avicorp has a $ 14.9 million debt issue outstanding, with a 5.8 % coupon rate. The debt has semi-annual coupons, the n...

You are considering a project with an initial investment of $20 million and annual cash flow...

Avicorp has a $12.5 million debt issue outstanding, with a 6.1% coupon rate. The debt has...

Avicorp has a $10.5 million debt issue outstanding, with a 5.9% coupon rate. The debt has...

Avicorp has a $11.1 million debt issue outstanding, with a 6.1% coupon rate. The debt has...

Avicorp has a $ 12.9$ million debt issue outstanding, with a 6.2 % coupon rate. The...

Avicorp has a $ 10.3 million debt issue outstanding, with a 5.8 % coupon rate. The...

Hayley makes annual end-of-year payments of $6,260.96 on a five-year loan with an 8 percent interest...

Suppose a project financed via an issue of debt requires five annual interest payments of $18...

Homework Answers

Add Answer to: Suppose a project financed via an issue of debt requires five annual interest payments of $18...

Post as a guest

Earn Coins

Add Answer to:
Suppose a project financed via an issue of debt requires five annual interest payments of $18...