A firm has interest expense of $2500 each year for ten years.If the tax rate is 30% and the discount rate is 7%,compute the value of the interest rate tax shield.
A)$5,744
B)$5918
C)$5268
D)$6987
E)$7212

Question

Quizplus · Accepted Answer

Interest rate tax shield = Interest expense * tax rate

= $2,500 * 0.3

= $750

Using the formula for present value of an annuity, the value of the interest rate tax shield over ten years at a discount rate of 7% is:

Value = $750 * [(1 - (1/1.07^10))/0.07]

= $5,268.24

Therefore, the best choice is C.

A Firm Has Interest Expense of $2500 Each Year for Ten