If a firm permanently borrows $50 million at an interest rate of 10%,what is the present value of the interest tax shield? Assume a 30% marginal corporate tax rate.
A)$50.0 million
B)$25.0 million
C)$15.0 million
D)$1.5 million

Question

Quizplus · Accepted Answer

The present value of the interest tax shield can be calculated using the formula:
PV of interest tax shield = (Interest expense) x (Marginal tax rate)

In this case, the interest expense is $50 million and the marginal tax rate is 30%. Therefore,
PV of interest tax shield = $50 million x 30% = $15 million

Hence, the best choice is C) $15.0 million.

If a Firm Permanently Borrows $50 Million at an Interest