Suppose the company Powerland borrows the new $2 million debt as perpetual bonds at a 5% cost which is equal to the risk-free rate (rf). If Corporate Income Tax rate is 23% rate and the Personal Tax for Debtholders is 5%, by how much does the interest tax shield increase the value of Powerland?

Suppose the company Powerland borrows the new $2 million debt as perpetual bonds at a 5% cost which is equal to the risk-free rate (rf). If Corporate Income Tax rate is 23% rate and the Personal Tax for Debtholders is 5%, by how much does the interest tax shield increase the value of Powerland?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Question

Suppose the company Powerland borrows the new $2 million debt as perpetual bonds at a 5% cost which is equal to the
risk-free rate (rf). If Corporate Income Tax rate is 23% rate and the Personal Tax for Debtholders is 5%, by how much does
the interest tax shield increase the value of Powerland?
a. $1,621,053
b. $100.000
C. - $100,000
Od. $460,000✓

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