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18 February, 04:24

If a firm permanently borrows $100 million at an interest rate of 8 percent, what is the present value of the interest tax shield? (Assume that the marginal corporate tax rate is 30 percent.)

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  1. 18 February, 04:40
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    The present value of the interest tax shield = 30% x $100 million = $30 million.

    Explanation:

    The interest tax shield refers to the amount of money that a business can deduct form income taxes due to interest expenses. A business can deduct the whole amount of money it spends as interest expenses. This deductions reduce the total costs of borrowing money.
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