The annual interest tax shield. Introduction: An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation , charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

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Answer 1

Question

Chapter 15, Problem 7P

a)

Summary Introduction

To determine: The annual interest tax shield.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

b)

Summary Introduction

To determine: The present value of interest tax shield at rate of 4%.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

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Arnell Industries has 5.5 million in permanent debt outstanding. The firm will pay interest only on this debt. Arnell's marginal tax rate is expected to be 40% for the foreseeable future. a. Suppose Arnell pays interest of 9% 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? c. Suppose instead the interest rate on the debt were 7%. What is the present value of the interest tax shield in this case?

DBF borrows $3.29B by issuing 12-year bonds. ECB's cost of debt is 6.07%, so it will need to pay interest each year for the next 12 years, and then repay the principal $3.29B in year 12. ECB's marginal tax rate will remain 42.99% throughout this period. By how much does the interest tax shield increase the value of DBF? NOTE: Provide your answers in Millions. E.G. for 100M you must enter 100.0000, for 20M you must enter 20.000, etc.

Your firm currently has $112 million in debt outstanding with a 10% interest rate. The terms of the loan require it to repay $28 million of the balance each year. Suppose the marginal corporate tax rate is 25%, and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt? The present value of the interest tax shields is $ million (Round to two decimal places)

Answer 2

Question

Chapter 15, Problem 7P

a)

Summary Introduction

To determine: The annual interest tax shield.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

b)

Summary Introduction

To determine: The present value of interest tax shield at rate of 4%.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

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Answer 3

Question

Chapter 15, Problem 7P

a)

Summary Introduction

To determine: The annual interest tax shield.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

b)

Summary Introduction

To determine: The present value of interest tax shield at rate of 4%.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

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Answer 4

Question

Chapter 15, Problem 7P

a)

Summary Introduction

To determine: The annual interest tax shield.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

b)

Summary Introduction

To determine: The present value of interest tax shield at rate of 4%.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

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Answer 5

Chapter 15, Problem 7P

a)

Summary Introduction

To determine: The annual interest tax shield.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

b)

Summary Introduction

To determine: The present value of interest tax shield at rate of 4%.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

Answer 6

Chapter 15, Problem 7P

a)

Summary Introduction

To determine: The annual interest tax shield.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

Answer 7

Chapter 15, Problem 7P

a)

Summary Introduction

To determine: The annual interest tax shield.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

Answer 8

b)

Summary Introduction

To determine: The present value of interest tax shield at rate of 4%.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

Answer 9

b)

Summary Introduction

To determine: The present value of interest tax shield at rate of 4%.

Introduction:

An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.

Answer 10

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Answer 11

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Answer 12

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Answer 13

Ch. 15.1 - With corporate income taxes, explain why a firms...Ch. 15.1 - Prob. 2CC Ch. 15.2 - With corporate taxes as the only market...Ch. 15.2 - How does leverage affect a firms weighted average...Ch. 15.3 - How can shareholders benefit from a leveraged...Ch. 15.3 - How does the interest tax shield enter into the...Ch. 15.4 - Prob. 1CC Ch. 15.4 - How does this personal tax disadvantage of debt...Ch. 15.5 - How does the growth rate of a firm affect the...Ch. 15.5 - Do firms choose capital structures that fully...

Solution Summary: The author explains that an interest tax shield lowers the overall cost of taxes owned by the individual taxpayer.

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