what is the present value of the interest tax shield? If a firm borrows S25 Mill
ID: 2794663 • Letter: W
Question
what is the present value of the interest tax shield? If a firm borrows S25 Million for one year at an interest rate of 8%, what is the present value of the interest tax shield? (Assume the corporate tax rate Tc-0.35) 5. A firm is proposing to undertake a scale expansion. It would cost $40 million and produce an expected cash flow of $5 million a year in perpetuity before it is taxed at the corporate rate of 34%. The firm is financed 40% by debt. The expected return on the firm's equity is 20% and the interest rate on its debt is 12%. What is the NPV of the project using the weighted average cost of capital?Explanation / Answer
1
Present value of Tax shield=Debt*Interest rate*Tax rate/(1+8%)=25*0.08*0.35/1.08=0.648148148
2
WACC=40%*12%*(1-34%)+60%*20%=15.168%
NPV=-40+5*(1-34%)/15.168%=-18.2436709
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