EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Chapter 15, Problem 8P
Summary Introduction
To determine: The
Introduction:
An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like
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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?
Your firm currently has $100 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $25 million of the balance each year.
Suppose that 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?
ICU Window, ing, is trying to determine its cost of debt. The firm has a debt issue outstanding with
10 years to maturity that is quoted at 104.5 percent of face value. The issue makes semiannual
payments and has an embedded cost of 5.6 percent annually. What is ICU's pretax cost of debt? If
the tax rate is 23 percent, what is the aftertax cost of debt?
Chapter 15 Solutions
EBK CORPORATE FINANCE
Ch. 15.1 - With corporate income taxes, explain why a firms...Ch. 15.1 - Prob. 2CCCh. 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. 1CCCh. 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...
Ch. 15 - Prob. 1PCh. 15 - Grommit Engineering expects to have net income...Ch. 15 - Suppose the corporate tax rate is 40%. Consider a...Ch. 15 - Braxton Enterprises currently has debt outstanding...Ch. 15 - Your firm currently has 100 million in debt...Ch. 15 - Arnell Industries has just issued 10 million in...Ch. 15 - Prob. 7PCh. 15 - Prob. 8PCh. 15 - Safeco Inc. has no debt, and maintains a policy of...Ch. 15 - Rogot Instruments makes fine violins and cellos....Ch. 15 - Rumolt Motors has 30 million shares outstanding...Ch. 15 - Summit Builders has a market debt-equity ratio of...Ch. 15 - NatNah, a builder of acoustic accessories, has no...Ch. 15 - Restex maintains a debt-equity ratio of 0.85, and...Ch. 15 - Acme Storage has a market capitalization of 100...Ch. 15 - Milton Industries expects free cash flow of 5...Ch. 15 - Prob. 17PCh. 15 - Kurz Manufacturing is currently an all-equity firm...Ch. 15 - Rally, Inc., is an all-equity firm with assets...Ch. 15 - Prob. 20PCh. 15 - Facebook, Inc. had no debt on its balance sheet in...Ch. 15 - Markum Enterprises is considering permanently...Ch. 15 - Garnet Corporation is considering issuing...Ch. 15 - Suppose the tax rate on interest income is 35%,...Ch. 15 - With its current leverage, Impi Corporation will...Ch. 15 - Colt Systems will have EBIT this coming year of 15...Ch. 15 - PMF, Inc., is equally likely to have EBIT this...
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- 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)arrow_forwardBBA Ltd has just issued $10 million in debt (at par or face value). The firm will pay interest only on this debt. BBA’s marginal tax rate is expected to be 30% for the foreseeable future. a) Suppose BBA pays interest of 6% per year on its debt. What is its annual interest tax shield? b) What is the present value of the interest tax shield, assuming the tax shield’s risk is the same as that of the loan? 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? Ten years have passed since BBA issued $10 million in perpetual interest-only debt with a 6% annual coupon. Tax rates have remained the same at 30% but interest rates have dropped so BBA’s current cost of debt capital is 4%. d) What is BBA’s annual interest tax shield now? e) What is the present value of the interest tax shield now?arrow_forwardYour firm currently has $108 million in debt outstanding with a 10% interest rate. The terms of the loan require it to repay $27 million of the balance each year. Suppose the marginal corporate tax rate is 21%, 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.)arrow_forward
- Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 16 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 4 percent annually. What is the company's pretax cost of debt? If the tax rate is 25%, what is the aftertax cost of debt?arrow_forwardICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 9 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 6.6 percent annually. What is the company's pretax cost of debt? If the tax rate is 24 percent, what is the aftertax cost of debt? Pretax cost of debt: __________% Aftertax cost of debt: __________%arrow_forwardYour firm currently has $96 million in debt outstanding with a 8% interest rate. The terms of the loan require the firm to repay $24 million of the balance each year. Suppose that the marginal corporate tax rate is 21%, 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.)arrow_forward
- Salinas Corporation has a net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas if it goes through with the debt issuance?arrow_forwardYour firm currently has $80 million in debt outstanding with a 8% interest rate. The terms of the loan require the firm to repay $20 million of the balance each year. Suppose that the marginal corporate tax rate is 21%, 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? (Round to two decimal places.) P15-10 Rogot Instruments makes fine violins and cellos. It has $1.2 million in debt outstanding, equity valued at $2.7 million and pays corporate income tax at rate 21%. Its cost of equity is 11% and its cost of debt is 8%. What is Rogot's pretax WACC? (Round to two decimalplaces.) What is Rogot's (effective after-tax) WACC? (Round to two decimalplaces.)arrow_forwardMudvayne, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 18 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 8 percent annually. What is the company's pretax cost of debt?If the tax rate is 35 percent, what is the aftertax cost of debt ?arrow_forward
- PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $20 million, $28 million, or $36 million. Its corporate tax rate is 38%, and investors pay a 30% tax rate on income from equity and a 35% tax rate on interest income. a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year? b. What is the effective tax advantage of debt for interest expenses in excess of $36 million? (Ignore carryforwards). c. What is the expected effective tax advantage of debt for interest expenses between $20 million and $28 million? (Ignore carryforwards). d. What level of interest expense provides PMF with the greatest tax benefit?arrow_forwardIn recent years, Haverhill Corporation has averaged net income of $10 million per year on net sales of $100 million per year. It currently has no long-term debt, but is considering a debt issue of $7.5 million. The interest rate on the debt would be 5 percent. Haverhill currently faces an effective tax rate of 45 percent. What would be Haverhill’s annual interest tax shield if it goes through with the debt issuance?arrow_forwardPMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $20 million, $28 million, or $36 million. Its corporate tax rate is 38%, and investors pay a 30% tax rate on income from equity and a 35% tax rate on interest income. a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year? b. What is the effective tax advantage of debt for interest expenses in excess of $36 million? (Ignore carryforwards). c. What is the expected effective tax advantage of debt for interest expenses between $20 million and $28 million? (Ignore carryforwards). d. What level of interest expense provides PMF with the greatest tax benefit? a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year? %. (Round to one If PMF has interest expenses of $16 million this coming year, the effective tax advantage is decimal place.)arrow_forward
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