Search Help Save &Exit; Problem 16-17 Tax Shields (LO2) Establishment Industries

Question

Search Help Save &Exit; Problem 16-17 Tax Shields (LO2) Establishment Industries borrow s $900 milion at an interest rate of 86% Establishment wil pay tax at an effect ve rate of 35%, what is the present value of interest tax shields 20 a it expects to maintain this debt level Into the far future? (Enter your answer in milions of dollars) b It expects to repay the deot at the end of 6 years? (Enter your answer in millons of dollars rounded to 2 decimal places c. It expects to maintain a constant debt ratio once R borows the $900 million and rAssets 10%6? (Do not round intermediate caliculations. Enter your answer in milions of doliars rounded to 1 decimal place) C Prev fs l Next 8 8 9

Explanation / Answer

a)

PV of tax shield = amount of debt * tax rate

= 900 million * 0.35

= 315 million

b)

interest = debt * interest rate

= 800 million * 8.6%

= 68.8 million

annual tax shield = tax rate * interest expense

= 0.35 * 68.8 million

= 24.08 million

PV of annuity = 24.08 * [1-(1+0.086)^-6]/0.086

= 109.32 million

c)

PV of tax shield = annual tax shield/interest rate

= 24.08/0.1

= 240.8 million

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