Your firm is in the 34% tax bracket. The yield to maturity on your existing bonds is 8%. The state of Georgia offers to loan your firm $1,000,000 with a TWO year AMORTIZING loan at a 5% rate of interest and ANNUAL payments due at the END OF THE YEAR. The interest will be deductible at the time that you pay. What is the APV of this below-market loan to your firm? I did not round any of my intermediate steps. You might be a little bit off. Pick the answer closest to yours.

Question

Quizplus · Accepted Answer

The APV (Adjusted Present Value) of the below-market loan is calculated by finding the present value of the interest tax shield. The interest tax shield is the tax savings from the interest deduction, which is the interest amount multiplied by the tax rate. The present value of these tax shields is then calculated using the firm's yield to maturity as the discount rate. The closest answer to this calculation is $64,157.38.

Your Firm Is in the 34% Tax Bracket