Today is January 1, 2009. The state of Iowa has offered your firm a subsidized loan. It will be in the amount of $10,000,000 at an interest rate of 5% and have ANNUAL (amortizing) payments over 3 years. The first payment is due today and your taxes are due January 1 of each year on the previous year's income. The yield to maturity on your firm's existing debt is 8%. What is the APV of this subsidized loan? If you rounded in your intermediate steps, the answer may be slightly different from what you got. Choose the closest.

Question

Quizplus · Accepted Answer

The APV (Adjusted Present Value) of the loan is calculated by finding the present value of the interest tax shield and subtracting the present value of the loan payments. The interest tax shield is calculated using the difference between the market interest rate (8%) and the subsidized rate (5%). The closest value to the calculated APV is $417,201.05.

Today Is January 1, 2009