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Suppose a project financed via an issue of debt requires six annual interest payments of $20 million each year. If the tax rate is 21% and the cost of debt is 6%, what is the value of the interest rate tax shield

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Answer:

$4,200,000

Explanation:

Given :

Annual interest payment = $20 million

Tax rate = 21%

Cost of debt = 6%

The value of the interest rate tax shield is given by :

The tax rate * annual interest payment

Tax rate = 21% = 21/100 = 0.21

Annual interest payment = $20,000,000

The value of interest rate tax shield = (0.21 * $20,000,000) = $4,200,000

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