A firm has interest expense of $6,500 each year for ten years. If the tax rate is 35% and the discount rate is 6%, compute the value of the interest rate tax shield.
A) $16,744
B) $16,424
C) $16,578
D) $16,987

Question

Quizplus · Accepted Answer

A) Tax shield for each year = interest expense × tax rate
Tax shield for each year = 6,500 × 0.35 = $2,275
Present value of 10 tax shield flows each equal to interest expense times tax rate.
Using a financial calculator at interest rate of 6%, PMT = 2,275, N = 10, equals $16,744.

A Firm Has Interest Expense of $6,500 Each Year for Ten