If a firm borrows $50 million for one year at an interest rate of 9%, what is the present value of the interest tax shield? Assume a 30% tax rate.
A) $50.00 million
B) $17.50 million
C) $1.445 million
D) $1.239 million

Question

Quizplus · Accepted Answer

The interest tax shield is calculated by multiplying the interest expense by the tax rate. In this case, the interest expense is $50 million * 0.09 = $4.5 million. The tax shield is then $4.5 million * 0.30 = $1.35 million. We need to find the present value of this tax shield, which can be calculated using the formula:

PV = FV / (1 + r)n

where PV is the present value, FV is the future value, r is the discount rate, and n is the number of years. In this case, n = 1 and r = 0.09.

PV = $1.35 million / (1 + 0.09) = $1.239 million

Therefore, the best choice is C, $1.445 million.

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