What is the present value of the tax shields for a firm that anticipates a perpetual debt level of $10 million at an interest rate of 7% and a tax rate of 35%?

Question

Quizplus · Accepted Answer

The present value of the tax shields is equal to the perpetual interest tax shield divided by the interest rate. The perpetual interest tax shield is calculated as the debt level multiplied by the tax rate, which gives:

Perpetual interest tax shield = $10 million x 0.35 = $3.5 million

Therefore, the present value of the tax shields is:

Present value of tax shields = $3.5 million / 0.07 = $50 million / 14 = $3.57 million

Rounding to the nearest hundred thousand gives the answer of $3,500,000 (Choice C).

What Is the Present Value of the Tax Shields for a Firm