Suppose a project financed via an issue of debt requires six annual interest payments of $20 million each year. If the tax rate is 30% and the cost of debt is 8%, what is the value of the interest rate tax shield?
A)$27.74 million
B)$32.64 million
C)$23.20 million
D)$31.35 million

Question

Quizplus · Accepted Answer

The interest rate tax shield is calculated as the total interest payments multiplied by the tax rate. Here, the total interest payments over six years are $20 million * 6 = $120 million. The tax shield is then $120 million * 30% = $36 million. However, since the cost of debt is 8%, we need to discount this tax shield to its present value: $36 million / (1 + 8%)^6 = $27.74 million.

Suppose a Project Financed Via an Issue of Debt Requires