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Compute present value of the interest tax shields

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Reference no: EM132705083

Suppose a firm takes out a $300 million loan today (at date t=0). The loan has a 12% interest rate, and the probability of default is zero. The loan is paid back in equal installments, that is, the loan contract specifies only two payments of exactly equal amounts at the end of years 1 and 2 (at dates 1 and 2). The firm's tax rate is 30%. Suppose the firm has sufficient profits to take full advantage of the interest tax shields provided by this loan.

Be sure to answer all of the parts of the question and clearly label your answer for each part. For example, begin your answer to part A with 'Part A:'

A. What is the payment that the firm makes on dates 1 and 2?

B. Using an APV approach, what is the present value of the interest tax shields associated with this loan?

Reference no: EM132705083

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