Suppose ECB from Example 16.3 borrows $2 billion by issuing 10-year bonds. ECB’s cost of debt is 6%, so it will need to pay $120 million in interest each year for the next 10 years, and then repay the principal of

$2 billion in year 10. ECB’s marginal tax rate will remain 25% throughout this period. By how much does the interest tax shield increase the value of ECB?

Data From Example 16.3:

Shown below is the pro-forma forecasted income statement for E. C. Builders (ECB). Given its marginal corporate tax rate of 25%, what is the amount of the interest tax shield for ECB in years 2020 through 2023?

Transcribed Image Text:

1 ECB Income Statement ($ million) 2 Total sales 3 Cost of sales 4 Selling, general, and administrative expense 5 Depreciation 6 Operating income 7 Other income 8 EBIT 9 Interest expense 10 Income before tax 11 Taxes (25%) 12 Net income 2020 2021 $3369 $3706 -2359 -2584 -226 -248 -22 -25 762 849 8 857 -80 777 -194 $583 7 769 -50 719 -180 $5.39 2022 $4077 -2867 -276 -27 907 10 917 -100 817 -204 $613 2023 $4432 -3116 -299 -29 988 12 1000 -100 900 -225 $675