A firm has interest expense of $3500 each year for ten years.If the tax rate is 35% and the discount rate is 8%,compute the value of the interest rate tax shield.
A)$7091
B)$7514
C)$8220
D)$8716
E)$8802

Question

Quizplus · Accepted Answer

The interest tax shield is calculated as the present value of the tax savings due to interest expense. The annual tax saving is $3500 * 35% = $1225. The present value of these savings over 10 years at an 8% discount rate is $1225 * [(1 - (1 + 0.08)^-10) / 0.08] = $8220.

A Firm Has Interest Expense of $3500 Each Year for Ten