Suppose a project financed via an issue of debt requires five annual interest payments of $18 million each year. If the tax rate is 35% and the cost of debt is 7%, what is the value of the interest rate tax shield?
A) $20.66 million
B) $31.00 million
C) $25.83 million
D) $51.66 million

Question

Quizplus · Accepted Answer

C) Value of tax shield each year equals tax rate times the interest payment.
Compute the present value of annuity of payments calculated above.
Tax shield = 0.35 × $18 million = $6.3 million; 11ea84dc_f50e_f135_9a63_b13e4469db41_TB1316_00_TB1316_00

Suppose a Project Financed Via an Issue of Debt Requires