Suppose a Project Financed Via an Issue of Debt Requires

question 2

Multiple Choice

Suppose a project financed via an issue of debt requires five annual interest payments of $10 million each year.If the tax rate is 30% and the cost of debt is 6%,what is the value of the interest rate tax shield?

• A)$11.35 million
• B)$12.21 million
• C)$13.20 million
• D)$12.64 million
• E)$15 million

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Definitions:

Residual Dividend Policy

A strategy where dividends paid to shareholders are set as the remaining profits after all project financing and working capital needs are met.

Capital Budget

The process and plan for determining and allocating resources, such as funds and investments, towards major long-term expenditures or projects of a company or government.

Dividend Payout Ratio

The fraction of net income a firm pays to its shareholders in dividends, expressed as a percentage of the company's total earnings.

Residual Dividend Policy

A strategy where dividends paid to shareholders are based on earnings left after the firm has funded all its capital investments.