If a firm permanently borrows $50 million at an interest rate of 10 percent, what is the present value of the interest tax shield? Assume a 30 percent marginal corporate tax rate.
A)$50 million
B)$25 million
C)$15 million
D)$1.5 million

Question

Quizplus · Accepted Answer

The present value of the interest tax shield can be calculated as follows:
PV of interest tax shield = ($50 million) x (0.10) x (0.30)
PV of interest tax shield = $1.5 million per year
Assuming the firm will permanently borrow $50 million, the present value of the interest tax shield would be calculated by discounting the $1.5 million per year by a suitable rate. However, the answer choices do not provide any discount rate to use, so we can assume that the present value equals the total value over time. Therefore, the present value of the interest tax shield would be:
PV of interest tax shield = $1.5 million x (infinite years)
PV of interest tax shield = $15 million

If a Firm Permanently Borrows $50 Million at an Interest