Assume the tax rate is 30 % and use the attached present value table if applicable to answer the below question:

 A Firm is proceeding with a bond issue to raise (borrow) $100 million. The interest rate is the cost of debt  of 8%, and interest will be paid annually for the nine (9) year term of the debt.

 If the company's tax rate  is 30%, what is the present value of the total interest tax shields of this nine-year debt?

 

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Periods 4% 1 10 11 12 23 23 Periods 4 12% 9% 10% 11% 0.9174 0.9091 0.9009 0.8929 0.8116 0.7972 0.8417 0.8264 0.7513 0.7312 0.7118 0.6587 0.6355 0.7722 6 7 8 4 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 5 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5935 0.5674 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4817 0.4523 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4039 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3522 0.3220 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.3173 0.2875 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2858 0.2567 9 56789112 Present Value Factors Present Value of $1 to be received after T periods: 10 Rate per period 8% 5% 0.9615 0.9524 6% 7% 0.9434 0.9346 0.9259 0.9246 0.9070 0.8900 0.8734 0.8573 0.8890 0.8638 0.8396 0.8163 0.7938 1 (1+r)T Present Value of an Ordinary Annuity of $1 per period for T periods: (²) (1 - 4% 5% 6% 0.9615 0.9524 0.9434 1.8594 1.8334 1.8861 2.7751 2.7232 3.6299 3.5460 4.4518 4.3295 5.2421 5.0757 6.0021 5.7864 6.7327 6.4632 7.4353 7.1078 8.1109 7.7217 8.7605 8.3064 9.3851 8.8633 (1+r)T Rate per period 7% 8% 9% 10% 11% 12% 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 1.8080 1.7833 1.7591 1.7355 1.7125 1.6901 2.6243 2.5771 2.5313 2.4869 2.4437 2.4018 3.3121 3.2397 3.1699 3.1024 3.0373 3.9927 3.8897 3.7908 3.6959 3.6048 4.6229 4.4859 4.3553 4.2305 4.1114 5.2064 5.0330 4.8684 4.7122 4.5638 5.7466 5.5348 5.3349 5.1461 4.9676 6.2469 5.9952 5.7590 5.5370 5.3282 6.7101 6.4177 6.1446 5.8892 5.6502 7.1390 6.8052 6.4951 6.2065 5.9377 7.5361 7.1607 6.8137 6.4924 6.1944 2.6730 3.4651 3.3872 4.2124 4.1002 4.9173 4.7665 5.5824 5.3893 6.2098 5.9713 6.8017 6.5152 7.3601 7.0236 7.8869 7.4987 8.3838 7.9427 Periods 4% 1 10 11 12 23 23 Periods 4 12% 9% 10% 11% 0.9174 0.9091 0.9009 0.8929 0.8116 0.7972 0.8417 0.8264 0.7513 0.7312 0.7118 0.6587 0.6355 0.7722 6 7 8 4 0.8548 0.8227 0.7921 0.7629 0.7350 0.7084 0.6830 5 0.8219 0.7835 0.7473 0.7130 0.6806 0.6499 0.6209 0.5935 0.5674 0.7903 0.7462 0.7050 0.6663 0.6302 0.5963 0.5645 0.5346 0.5066 0.7599 0.7107 0.6651 0.6227 0.5835 0.5470 0.5132 0.4817 0.4523 0.7307 0.6768 0.6274 0.5820 0.5403 0.5019 0.4665 0.4339 0.4039 0.7026 0.6446 0.5919 0.5439 0.5002 0.4604 0.4241 0.3909 0.3606 0.6756 0.6139 0.5584 0.5083 0.4632 0.4224 0.3855 0.3522 0.3220 0.6496 0.5847 0.5268 0.4751 0.4289 0.3875 0.3505 0.3173 0.2875 0.6246 0.5568 0.4970 0.4440 0.3971 0.3555 0.3186 0.2858 0.2567 9 56789112 Present Value Factors Present Value of $1 to be received after T periods: 10 Rate per period 8% 5% 0.9615 0.9524 6% 7% 0.9434 0.9346 0.9259 0.9246 0.9070 0.8900 0.8734 0.8573 0.8890 0.8638 0.8396 0.8163 0.7938 1 (1+r)T Present Value of an Ordinary Annuity of $1 per period for T periods: (²) (1 - 4% 5% 6% 0.9615 0.9524 0.9434 1.8594 1.8334 1.8861 2.7751 2.7232 3.6299 3.5460 4.4518 4.3295 5.2421 5.0757 6.0021 5.7864 6.7327 6.4632 7.4353 7.1078 8.1109 7.7217 8.7605 8.3064 9.3851 8.8633 (1+r)T Rate per period 7% 8% 9% 10% 11% 12% 0.9346 0.9259 0.9174 0.9091 0.9009 0.8929 1.8080 1.7833 1.7591 1.7355 1.7125 1.6901 2.6243 2.5771 2.5313 2.4869 2.4437 2.4018 3.3121 3.2397 3.1699 3.1024 3.0373 3.9927 3.8897 3.7908 3.6959 3.6048 4.6229 4.4859 4.3553 4.2305 4.1114 5.2064 5.0330 4.8684 4.7122 4.5638 5.7466 5.5348 5.3349 5.1461 4.9676 6.2469 5.9952 5.7590 5.5370 5.3282 6.7101 6.4177 6.1446 5.8892 5.6502 7.1390 6.8052 6.4951 6.2065 5.9377 7.5361 7.1607 6.8137 6.4924 6.1944 2.6730 3.4651 3.3872 4.2124 4.1002 4.9173 4.7665 5.5824 5.3893 6.2098 5.9713 6.8017 6.5152 7.3601 7.0236 7.8869 7.4987 8.3838 7.9427

Answer rating: 100% (QA)

SOLUTION To calculate the present value of the total interest tax shields of the nineyear debt we need to determine the tax shield for each year and discount them to their present value using the appr... View the full answer