If a firm borrows $50 million for one year at an interest rate of 10%, what is the present value of the interest tax shield? Assume a 30% tax rate. (Approximately.)
A) $1.364 million
B) $1.5 million
C) $1.0 million
D) $4.545 million
E) None of the above

Question

Quizplus · Accepted Answer

The present value of the interest tax shield is $1.364 million. This is calculated as follows:PV = (Interest expense * Tax rate) / (1 + Discount rate)^nPV = ($50 million * 0.30) / (1 + 0.10)^1PV = $1.364 million

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