Ten years have passed since Arnell issued $15 million in perpetual interest only debt with a 7% annual coupon, as in Problem 6. Tax rates have remained the same at 35% but interest rates have dropped, so Arnell’s current cost of debt capital is 2%.

a. What is Arnell’s annual interest tax shield?

b. What is the present value of the interest tax shield today?

Problem 6

Arnell Industries has just issued $15 million in debt (at par). The firm will pay interest only on this debt. Arnell’s marginal tax rate is expected to be 35% for the foreseeable future.