Establishment Industries borrows $770 million at an interest rate of 7.3%. Estab

Question

Establishment Industries borrows $770 million at an interest rate of 7.3%. Establishment will pay tax at an effective rate of 35%. What is the present value of interest tax shields if:

a. It expects to maintain this debt level into the far future? (Enter your answer in millions of dollars.)

b. It expects to repay the debt at the end of 6 years? (Enter your answer in millions of dollars rounded to 2 decimal places.)

c. It expects to maintain a constant debt ratio once it borrows the $770 million and rAssets = 10%? (Do not round intermediate calculations. Enter your answer in millions of dollars rounded to 1 decimal place.)

Explanation / Answer

a. It expects to maintain this debt level into the far future

770 X 7.3/100 X35/100 = $ 18.865 million

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