Find the value of interest tax shield from new debt

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Problem 1 - Markum Enterprises is considering permanently adding an additional $169 million of debt to its capital structure. Markum's corporate tax rate is 40%.

A. In the absence of personal taxes, the value of interest tax shield from new debt should be (?)

B. If investors pay a tax rate of 45% on interest income, and a tax rate of 25% on income from dividends and capital gains, what is the value of the interest tax shield from the new debt should be?

Problem 2 - With its current leverage, Impi Corporation will have net income next year of $9 million.

A. If Impi's corporate tax rate is 40%, and it pays 6% interest on its debt, how much debt can Impi issue this year and still receive the benefit of the interest tax shield next year?

Reference no: EM132456609

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