Markum Enterprises is considering permanently adding an additional $83 million o

Question

Markum Enterprises is considering permanently adding an additional $83 million of debt to its capital structure. Markum's corporate tax rate is 30 %.

a. Absent personal taxes, what is the value of the interest tax shield from the new debt?

b. If investors pay a tax rate of 45 % on interest income, and a tax rate of 25% on income from dividends and capital gains, what is the value of the interest tax shield from the new debt?

Please show all work along with detailed explanation, perhaps using excel.

Explanation / Answer

a) PV = c D = 30% × 83 = $24.9 million.

b) * = 1 - (1-0.30)(1-0.25)/(1-0.45) = 4.54%

PV = c D =4.54% * 83 = $3.77 million

Related Questions

Navigate

• Browse (All)
• Browse M
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.