CQSearch 140 Help Save &Eit; Check m 2 Problem 16-17 Tax Shields (LO2) 20 Establ

Question

CQSearch 140 Help Save &Eit; Check m 2 Problem 16-17 Tax Shields (LO2) 20 Establishment industries borrows $860 millon at an interest rate of 8.2% Establishment will pay tax at an effective rate of 35%, what is the present vialue 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 5 years? (Enter your answer in millions of dolars rounded to 2 decimal places.) &It; expects to maintain a constam debt ratio once it borrows the S860 malon and /Assets-10%?(Do not round wermediate calculations. Enber your answee in mitions of dollars rounded to 1 decimal place) Pm 2e15111 Next > 8 0 0

Explanation / Answer

a)

PV of tax shield = amount of debt * tax rate

= 860 million * 0.35

= 301 million

b)

interest = debt * interest rate

= 860 million * 8.2%

= 70.52 million

annual tax shield = tax rate * interest expense

= 0.35 * 70.52 million

= 24.682 million

PV of annuity = 24.682 * [1-(1+0.082)^-5]/0.082

= 98.03 million

c)

PV of tax shield = annual tax shield/interest rate

= 24.682/0.1

= 246.82 million

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