Suppose a project financed via an issue of debt requires five annual interest payments of $20 million each year.If the tax rate is 30%,and the present value of the interest tax shield is 25.98 million,what is the firm's cost of debt?
A)3%
B)4%
C)5%
D)6%
E)7%

Question

Quizplus · Accepted Answer

The present value of the interest tax shield is calculated as the interest payment multiplied by the tax rate and then discounted at the firm's cost of debt. Solving for the cost of debt using the given present value of the tax shield ($25.98 million) and the annual interest payment ($20 million) at a tax rate of 30% gives a cost of debt of 5%.

Suppose a Project Financed Via an Issue of Debt Requires