quiz 8

q.6 Arnell Industries has just issued $25 million in debt (at par). The firm will pay interest only on this debt. Arnell's marginal tax rate is expected to be 21%

for the foreseeable future.

a. Suppose Arnell pays interest of 8% per year on its debt. What is its annual interest tax shield?

b. What is the present value of the interest tax shield, assuming its risk is the same as the loan?

c. Suppose instead that the interest rate on the debt is 10%.

What is the present value of the interest tax shield in this case?

a. Suppose Arnell pays interest of 8% per year on its debt. What is its annual interest tax shield? If Arnell pays interest of 8% per year on its debt, the annual interest tax shield is $_________million. (Round to three decimal places.)

b. What is the present value of the interest tax shield, assuming its risk is the same as the loan?

The present value of the interest tax shield is $______million.(Round to one decimal place.)

c. Suppose instead that the interest rate on the debt is 10%. What is the present value of the interest tax shield in this case? If instead the fair interest rate on the debt is 10%, the present value of the interest tax shield is $____________ million. (Round to one decimal place.)