Salinas Corporation has net income of $15 million per year on net sales of $90 m

Question

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt, but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp. if it goes through with the debt issuance?

Salinas Corporation has net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt, but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas Corp. currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas Corp. if it goes through with the debt issuance?

Explanation / Answer

Annual Interest tax shield = Interest * tax)

                                      = 1.40 million * . 40)

                                     = $ .56 million or $ 560,000

**Interest = debt *rate of interest

             = 20 million * .07

            = $ 1.40 million

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