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
PV of interest tax shield = ((0.3)(50)(0.1))/1.1 = $1.364

Question

Quizplus · Accepted Answer

The present value of the interest tax shield is calculated as the tax rate (30%) multiplied by the interest ($50 million * 10%), divided by (1 + interest rate), which equals approximately $1.364 million.

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