A firm has interest expense of $3,500 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) $7,091
B) $7,514
C) $8,220
D) $8,716

Question

Quizplus · Accepted Answer

C) Tax shield for each year = interest expense × tax rate
Tax shield for each year = 3,500 × 0.35 = $1,225
Present value of 10 tax shield flows each equal to interest expense times tax rate.
Using a financial calculator at interest rate of 8%, PMT = 1,225, N = 10, equals $8,220.

A Firm Has Interest Expense of $3,500 Each Year for Ten