A firm has interest expense of $2,500 each year for ten years. If the tax rate is 30% and the discount rate is 7%, compute the value of the interest rate tax shield.
A) $5,744
B) $5,918
C) $5,268
D) $6,987

Question

Quizplus · Accepted Answer

C) Tax shield for each year = interest expense × tax rate
Tax shield for each year = 2,500 × 0.30 = $750
Present value of 10 tax shield flows each equal to interest expense times tax rate.
Using a financial calculator at interest rate of 7%, PMT = 750, N = 10, equals $5,268.

A Firm Has Interest Expense of $2,500 Each Year for Ten