Your Firm Currently Has $250 Million in Debt Outstanding with an 8

question 15

Essay

Your firm currently has $250 million in debt outstanding with an 8% interest rate.The terms of the loan require the firm to repay $50 million of the balance each year.Suppose that the marginal corporate tax rate is 35% 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?

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Definitions:

Precautionary Demand

The desire to hold cash or liquid assets to guard against unexpected events.

Payments to Vendors

Money transfers made by a business to its suppliers for goods or services received.

Demand Deposit

Bank accounts that allow the holder to withdraw funds without prior notice, such as a checking account.

Marketable Securities

Financial instruments that can easily be sold or converted into cash at a value close to their market rate.