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.
-Assume that five years have passed since Wyatt issued this debt.While tax rates have remained at 21%,interest rates have dropped so that Wyatt's current cost of debt capital is now only 4%.Wyatt's annual interest tax shield is now closest to:

Question

Quizplus · Accepted Answer

The annual interest tax shield is equal to the annual interest payment multiplied by the corporate tax rate. The annual interest payment is equal to the face value of the debt multiplied by the annual coupon rate. The face value of the debt is $100 million and the annual coupon rate is 7%. Therefore, the annual interest payment is $7 million. The corporate tax rate is 21%. Therefore, the annual interest tax shield is $7 million * 21% = $1.47 million.

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