Compute the present value of the tax shield generated when Smith Company issues $100 mn.in perpetual debt with an 8% coupon rate, and uses the proceeds to retire equity.The corporate tax rate is 34%.
A)$2.72 mn.
B)$8 mn.
C)$34 mn.
D)272 mn.

Question

Quizplus · Accepted Answer

The present value of the tax shield is calculated as the tax rate multiplied by the debt amount. Here, it is 34% of $100 million, which equals $34 million.

Compute the Present Value of the Tax Shield Generated When