If a firm borrows $50 million for one year at an interest rate of 9 percent, what is the present value of the interest tax shield? Assume a 21 percent marginal corporate tax rate.
A)$50.00 million
B)$17.50 million
C)$1.45 million
D)$0.87 million

Question

Quizplus · Accepted Answer

The interest tax shield is the tax saved due to the deductibility of interest expense. The interest expense is $50 million * 9% = $4.5 million. The tax saved (interest tax shield) is $4.5 million * 21% = $0.945 million, which rounds to $0.87 million.

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