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

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.)

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.

Explanation / Answer

a>Interest =1500*0.06 90 PV of Interest =90/(1.06) 84.91 PV of tax shield=0.34*84.91 28.87 b>Interest per year=1500*0.06 90 PV of Interest=90/(1.06^1)+90/(1.06^2)+90/(1.06^3)+90/(1.06^4)+90/(1.06^5) 379.11 PV of Interest shield=0.34*379.11 128.90 c> Interest per year 90 PV of interest in perpetuity=90/0.05 1800 PV of interest shield=0.34*1800 612

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