Use the following information to answer the question(s)below.
Wyatt Oil issued $100 million in perpetual debt (at par)with an annual coupon of 7%.Wyatt will pay interest only on this debt.Wyatt's corporate tax rate is expected to be 21% for the foreseeable future.
-The present value of Wyatt's annual interest tax shield is closest to:

Question

Quizplus · Accepted Answer

The present value of the interest tax shield is calculated as the annual interest payment multiplied by the corporate tax rate, divided by the cost of debt. Here, the annual interest payment is $7 million (7% of $100 million), and the tax shield is $7 million * 21% = $1.47 million per year. Since the debt is perpetual, the present value of the tax shield is $1.47 million / 0.07 = $21 million.

Use the Following Information to Answer the Question(s)below