What is the present value of the tax shield to a firm that has a capital structure consisting of $100 million of perpetual debt and $180 million of equity, if the average interest rate on debt is 9%, the return on equity is 13%, and the marginal tax rate is 40%?
A) $72 million
B) $40 million
C) $60 million
D) $3.6 million

Question

Quizplus · Accepted Answer

The present value of the tax shield is calculated as the tax rate multiplied by the amount of debt. Thus, 0.40 * $100 million = $40 million.

What Is the Present Value of the Tax Shield to a Firm