Suppose a project financed via an issue of debt requires five annual interest payments of $10 million each year.If the tax rate is 30% and the cost of debt is 6%,what is the value of the interest rate tax shield?
A)$11.35 million
B)$12.21 million
C)$13.20 million
D)$12.64 million
E)$15 million

Question

Quizplus · Accepted Answer

The value of the interest rate tax shield can be calculated using the formula:

Interest tax shield = (interest payment) x (tax rate)

= $10 million x 0.3

= $3 million

This value will be received annually for the duration of the debt financing, which is five years. Therefore, we can calculate the present value of the interest tax shield using the formula:

PV of interest tax shield = (interest tax shield) x [1 - (1 + r)^-n] / r

Where r is the cost of debt and n is the number of years

= $3 million x [1 - (1 + 0.06)^-5] / 0.06

= $12.64 million

Therefore, the correct answer is D.

Suppose a Project Financed Via an Issue of Debt Requires