Present value of the interest tax shields from the debt
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Your firm currently has $100 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $25 million of the balance each year. Suppose that the marginal corporate tax rate is 40%, and that the interest tax shields have the same risk as the loan.
What is the present value of the interest tax shields from this debt?
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The solution explains how to calculate the present value of the interest tax shields from the debt
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The debt will last for 4 years since we are repaying $25 million each year. We calculate the interest tax shield for each year and discount by the cost of debt which is 10% to find ...
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