Question Compute the present value of interest tax shields generated by these th

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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 = 0.34. a. A $1,500, one-year loan at 6%.(Do not round intermediate calculations. Round your answer to 2 decimal places.) PV (tax shield) $ b. A five-year loan of $1,500 at 6%. Assume no principal is repaid until maturity. (Do not round intermediate calculations. Round your answer to 2 decimal places.) PV (tax shield) $ c. A $1,500 perpetuity at 5%. PV (tax shield) $

Explanation / Answer

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 = 0.34.

a. A $1,500, one-year loan at 6%.(Do not round intermediate calculations. Round your answer to 2 decimal places.)

PV (tax shield) = Tc * (rdD)/(1+rd)

PV (tax shield) = 0.34*(6%*1500)/(1+6%)

PV (tax shield) = $ 28.87

b. A five-year loan of $1,500 at 6%. Assume no principal is repaid until maturity. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

PV (tax shield) = Tc * (rdD)*PVIFA (rd,n)

PV (tax shield) = 0.34*(6%*1500)*PVIFA(6%,5)

PV (tax shield) = 30.60 * 4.2124

PV (tax shield) = $ 128.90

c. A $1,500 perpetuity at 5%.

PV (tax shield) = Tc * (rdD)/ rd

PV (tax shield) = 0.34*(6%*1500)/6%

PV (tax shield) = $ 510

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