Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Chapter 15, Problem 6P

Arnell Industries has just issued $10 million in debt (at par). The firm will pay interest only on this debt. Arnell’s marginal tax rate is expected to be 35% for the foreseeable future.

  1. a. Suppose Arnell pays interest of 6% per year on its debt. What is its annual interest tax shield?
  2. b. What is the present value of the interest tax shield, assuming its risk is the same as the loan?
  3. c. Suppose instead that the interest rate on the debt is 5%. What is the present value of the interest tax shield in this case?
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