Question
5. ABC Inc. currently (at t =0) has an outstanding debt of $120 million, which is scheduled to be paid in four equal annual instalments
5. ABC Inc. currently (at t=0) has an outstanding debt of $120 million, which is scheduled to be paid in four equal annual instalments of $30 million each, with the first annual instalment to be paid at t=1. Assume that interest on the outstanding amount at the end of the year t will be paid at the end of the year t+1 and will be deducted from the income for the year between time t and time t+1 before corporate tax is computed. Given that rD, the cost of debt capital for this firm, is 6.75% and that corporate profits are taxed at 21%, work out the present value of the tax shield on account of this issue of debt.
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