Establishment Industries borrows $800 million at an interest rate of 7.6%. Estab

Question

Establishment Industries borrows $800 million at an interest rate of 7.6%. Establishment will pay tax at an effective marginal rate of 35%. What is the present value of interest tax shields if:

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

It expects to repay the debt at the end of 5 years? (Enter your answer in millions of dollars rounded to 2 decimal places.)

It expects to maintain a constant debt ratio once it borrows the $800 million and rAssets = 10%? (Do not round intermediate calculations. Enter your answer in millions of dollars rounded to 1 decimal place.)

Establishment Industries borrows $800 million at an interest rate of 7.6%. Establishment will pay tax at an effective marginal rate of 35%. What is the present value of interest tax shields if:

Explanation / Answer

All Amounts in $ miilins i) Value of the loan      800.00 Interest @ 7.6% (800*7.6%)         60.80 Tax Shield (60.8*35%)         21.28 PV of Tax Shield (21.28/7.6%)      280.00 ** Here there is specific interest rate to discount the cash flows. As per Accepted principles, Cost of Borrowing is the Discount factor. There by Intreets tac shields are discounted at 7.6% rate ii) If loan is repaid in 5 years: Year Tax shield PVAF @ 7.6% Present Value 1 21.28 0.929368 19.77695 2 21.28 0.863725 18.38007 3 21.28 0.802718 17.08185 4 21.28 0.746021 15.87532 5 21.28 0.693328 14.75402 PV 85.8682 PV of Tx Shiled $    85.87

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