Problem What ?sthe annual tax shield to a firm that has a capital stricture com

Question

Problem What ?sthe annual tax shield to a firm that has a capital stricture com asting of S100 million ofdelt and $180 million of equity, if the average marginal tax rate is 40%? interest rate on debt is9%, de return on equity is 13%.and the Problem 2 The maragement of Graphicopy is trying to determine how much debt they should have in their capital structure. If they sell S500,000 in perpetual bonds with a 9 pervent coupon, what would be the presens value of the tax shield? Assume the marginal tax rate is35%.

Explanation / Answer

1 Annual Tax Shield Total Debt    100,000,000.00 Interest Rate 9% Interest on Debt         9,000,000.00 Tax Rate 40% Annual Tax Shield         3,600,000.00 2 Debenture            500,000.00 Interest Rate 9% Interest on Debt               45,000.00 Tax Rate 35% Annual Tax Shield               15,750.00 Present Value of Annual Tax Shield 15750/9% Present Value of Annual Tax Shield            175,000.00

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