On January 1st 2015, DL Corp. signed a 5-year $30 million loan contract with Bank of Fisher with annual interest rate of 8%. The loan will be automatically rolled over unless either party opts out. The corporate tax rate is 35% till the end of 2017. Starting from January 1st 2018, the corporate tax rate is lowered to 21%. Assuming the lending relationship is stable, what is the present value on January 1st 2015 of the tax shield effect from the loan contract?
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Year | Interest | Tax rates | Tax shield | Discounting Factor | Present Values |
2015 | 2.4 | 35.00% | 0.840 | 0.925925926 | 0.777777778 |
2016 | 2.4 | 35.00% | 0.840 | 0.85733882 | 0.720164609 |
2017 | 2.4 | 35.00% | 0.840 | 0.793832241 | 0.666819082 |
2018 | 2.4 | 21.00% | 0.504 | 0.735029853 | 0.370455046 |
2019 | 2.4 | 21.00% | 0.504 | 0.680583197 | 0.343013931 |
Total | 2.878230446 |
Here we have assumed that the interest rate on the loan itself is the discount rate for present values.
Discounting factor = 1 / ( 1 + r) ^n
where r = rate of interest
n= no of years for which the cash flow is far from year 0.
On January 1st 2015, DL Corp. signed a 5-year $30 million loan contract with Bank of...