Use the information for the question(s)below.
LCMS Industries has $70 million in debt outstanding.The firm will pay only interest on this debt (the debt is perpetual).LCMS' corporate tax rate is 21% and the firm pays a rate of 8% interest on its debt.
-Assuming that the risk of the tax shield is only 6% even though the debt pays 8%,then the present value of LCMS' interest tax shield is closest to:

Question

Quizplus · Accepted Answer

The present value of the interest tax shield can be calculated using the formula:

PV(Tax shield) = TC * D * r / (r - g)

where TC is the corporate tax rate, D is the amount of debt outstanding, r is the pre-tax cost of debt, and g is the growth rate of the tax shield.

In this case, TC = 0.21, D = $70 million, r = 0.08, and g = 0.06. Plugging these values into the formula, we get:

PV(Tax shield) = 0.21 * $70 million * 0.08 / (0.08 - 0.06) = $19.6 million

Therefore, the answer is C) $19.6 million.

Use the Information for the Question(s)below