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 40%,interest rates have dropped so that Wyatt's current cost of debt capital is now only 4%.The present value of Wyatt's annual interest tax shield is now closest to:

Question

Quizplus · Accepted Answer

The annual interest payment on the debt is $100 million * 7% = $7 million. 
The interest tax shield is calculated as the product of the interest payment and the tax rate, so the interest tax shield is $7 million * 21% = $1.47 million per year. 
To calculate the present value of the interest tax shield, we use the formula PV = (interest tax shield) / (cost of debt). 
Using the information given, the present value is $1.47 million / 4% = $36.75 million. 
Therefore, the closest answer choice is B) $36.8 million.

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