A firm has interest expense of $3 500 each year for 10 years. If the tax rate is 35% and the discount rate is 8%, compute the value of the interest rate tax shield.
A)$8 220
B)$7 091
C)$7 514
D)$8 716

Question

Quizplus · Accepted Answer

The present value of the interest tax shield is $8,220. The interest tax shield is the amount of taxes saved due to the deductibility of interest expense. The present value of the interest tax shield is calculated as follows:PV = (Interest expense * Tax rate * Discount factor) * Number of yearsPV = ($3,500 * 0.35 * 0.6768) * 10PV = $8,220

A Firm Has Interest Expense of $3 500 Each Year