Compute the present value of interest tax shields generated by these three debt

Question

Compute the present value of interest tax shields generated by these three debt issues. Consider corporate taxes only. The marginal tax rate is Tc = 0.35.

  

A $1,800, one-year loan at 10%.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

  

  

A four-year loan of $1,800 at 10%. Assume no principal is repaid until maturity. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

  

  

  

a.

A $1,800, one-year loan at 10%.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

a)

b)

c)

= $1,800 *35%

= $630

Present value FV×(1÷(1+r)^n) Here, 1 Interest rate per annum 10.00% 2 Number of years                                  1 3 Number of compoundings per per annum                                  1 4 = 1÷3 Interest rate per period ( r) 10.00% 5 = 2×3 Number of periods (n) 1 Future value (FV) $                     63.00 1800*10%*35% Substitute these values in Present value formula Present value $                     57.27 63*(1/(1+10%)^1)

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