Braylon Corporation has just issued $15 million in debt (at par). The firm will pay interest only on this debt. Braylon's marginal tax rate is expected to be 30% for the foreseeable future. a. Suppose Braylon pays interest of 7% 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 (use the same interest rate as discount rate)? c. Suppose instead that the interest rate on the debt is 5.5%. What is the present value of the interest tax shield in this case?

Braylon Corporation has just issued $15 million in debt (at par). The firm will pay interest only on this debt. Braylon's marginal tax rate is expected to be 30% for the foreseeable future. a. Suppose Braylon pays interest of 7% 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 (use the same interest rate as discount rate)? c. Suppose instead that the interest rate on the debt is 5.5%. What is the present value of the interest tax shield in this case?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 3P

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