Your firm currently has $ 104 million in debt outstanding with a 10 % interest rate. The terms of the loan require it to repay $ 26 million of the balance each year. Suppose the marginal corporate tax rate is 40 %, and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt?
Current debt 104 millions
Every year repayment 26 millions
Every year debt will reduced by $26 millions.
Interest tax shield formula = interest * Tax rate
Outstanding debt. interest@10% Tax shield @40% on int. P.V.F @10%. P.V. of tax shield
Year. 1. 104. 10.4 4.16 0.9090909091. 3.781818182
Year 2 78. 7.8 3.12 0.826446281 2.578512397
Year 3 52 5.2 2.08 0.7513148009. 1.562734786
Year 4 26. 2.6. 1.04 0.6830134554 0.7103339936
Total 8.633399358
So, present value of tax shield is $8.633 millions.
Note : P.V.F. formula = 1/(1+I)^n
like for 1 year 1/(1+0.10)^1
like for 1 year 1/(1+0.10)^2 and so on.
Your firm currently has $ 104 million in debt outstanding with a 10 % interest rate....
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