If a firm borrows $50 million for one year at an interest rate of 10 percent, what is the present value of the interest tax shield? Assume a 21 percent marginal corporate tax rate.
A)$0.95 million
B)$1.50 million
C)$1.00 million
D)$4.55 million

Question

Quizplus · Accepted Answer

The present value of the interest tax shield is $0.95 million. This is calculated as follows:PV = (Interest expense * Tax rate) / (1 + Discount rate)PV = ($50 million * 0.21) / (1 + 0.10)PV = $10.5 million / 1.10PV = $9.55 million

If a Firm Borrows $50 Million for One Year at an Interest