Question

Suppose a project financed via an issue of debt requires six annual interest payments of $18 million each year. If the tax rate is 35% and the cost of debt is 8%, what is the value of the interest rate tax shield

Answer 1

Answer:

$29.12 million

Explanation:

Data given in the question

Interest payment = $18 million

Time period = 6 years

Tax rate = 35%

The cost of debt = 8%

So now annual interest tax shield is

= $18 million × 0.35

= $6.3 million

Now the  value of the interest rate tax shield is

= Annual interest tax shield × PVIF factor for 8% at 6 years

= $6.3 million × 4.6229

= $29.12 million