If a Firm Permanently Borrows $100 Million at an Interest

question 63

Multiple Choice

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

• A) $8.00 million
• B) $5.6 million
• C) $30 million
• D) $26.67 million
• E) None of the above
• PV of interest tax shield = (0.3)(100) = $30 million

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Definitions:

Cost of Capital

The rate of return a company must earn on its investments to satisfy its investors or lenders.

Hurdle Rate

The minimum rate of return that an investment project must generate before it is considered viable or attractive for investment.

Break-Even Time

The period it takes for a business to recover its investments or expenses and start generating profit.

Highest Rank

Refers to the position or level within a hierarchy or organizational structure that is at the top or most senior.