A firm has interest expense of $6500 each year for ten years.If the tax rate is 35% and the discount rate is 6%,compute the value of the interest rate tax shield.
A)$16,744
B)$16,424
C)$16,578
D)$16,987
E)$17,219

Question

Quizplus · Accepted Answer

The interest tax shield is calculated as the present value of the tax savings due to interest expense. The formula is: Interest Tax Shield = Interest Expense * Tax Rate * [(1 - (1 + Discount Rate)^-n) / Discount Rate]. Plugging in the values: $6500 * 0.35 * [(1 - (1 + 0.06)^-10) / 0.06] = $16,744.

A Firm Has Interest Expense of $6500 Each Year for Ten