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%?
A) $245,000
B) $700,000
C) $3,500,000
D) $10,000,000

Question

Quizplus · Accepted Answer

The present value of tax shields formula is PVTS = TC x D / r, where TC = tax rate, D = debt level, and r = cost of debt. Plugging in the values given, we get PVTS = 0.35 x 10,000,000 / 0.07 = $3,500,000. Therefore, the correct answer is C.

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