Suppose a project financed via an issue of debt requires five annual interest payments of $12 million each year. If the tax rate is 35% and the cost of debt is 5%, what is the value of the interest rate tax shield?
A) 14.55 million
B) $21.82 million
C) $36.37 million
D) $18.18 million

Question

Quizplus · Accepted Answer

D) 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 × 12 million = $4.2 million; 11ea84dc_f50e_7c03_9a63_35ebaa34cec5_TB1316_00_TB1316_00

Suppose a Project Financed Via an Issue of Debt Requires