Question

Markum Enterprises is considering permanently adding an additional $182 million of debt to its capital structure. Markum's corporate tax rate is 30%. a. Absent personal taxes, what is the value of the interest tax shield from the new debt? b. If investors pay a tax rate o 40% on interest income, and a tax rate of 20% on income from dividends and capital gains, what is he value o the interest tax shield from the new debt? a. Absent personal taxes, what is the value of the interest tax shield from the new debt? In the absence of personal taxes, the value of interest tax shield from new debt should be S million. (Round to two decimal places.) b t investors pay a tax rate o 40% on interest income, and a tax rate of 20 % on income from dividends and cap al gains hat is tha valu a o then e es ax sied om enew det? lf investors pay a ax rate o 40% on interest income, and a tax rte of 20 places.) on income from dividends and capital gains, the value of the interest tax shield rom new debt should be Round o t o decima mil on 15-22

Answer 1

a) In the absence of personal taxes, the value of tax shield would be=$182 million* tax rate

=$182*30%

=$54.6 million

b) If the investor pays a tax rate of -40% on interest income

-20% on income from dividends and capital gains then the value of tax shield from new debt would be=1- (1-.30)(1-.20)/(1-.40) that is 1- (1- corporate tax rate)(1- tax on capital gain and dividend income)/(1-tax on int. income)

=6.67%

so tax shield  on new debt would be $182 million* 6.67%

=$12.14 million (approx)