Arnell Industries has just issued $10 million in debt (at par). The firm will pay interest only
Question:
a. Suppose Arnell pays interest of 6% per year on its debt. What is its annual interest tax shield?
b. What is the present value of the interest tax shield, assuming its risk is the same as the loan?
c. Suppose instead that the interest rate on the debt is 5%. What is the present value of the interest tax shield in this case?
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Interest, debt, finance, and capital markets are all important concepts in the world of economics and business. Interest is the cost of borrowing money, and it is typically expressed as a percentage of the amount borrowed. Debt is the money that is borrowed, and it has to be repaid with interest. Finance is the study of how individuals, companies, and organizations manage their money and investments. Capital markets are the places where companies and governments can raise money by selling stocks and bonds to investors. These markets play an important role in the overall economy by helping to fund investment and growth.
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