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Natasha_Volkova [10]
3 years ago
9

Your firm currently has $ 100 million in debt outstanding with a 10 % interest rate. The terms of the loan require the firm to r

epay $ 25 million of the balance each year. Suppose that the marginal corporate tax rate is 40 %​, and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this​ debt?
Business
1 answer:
balu736 [363]3 years ago
6 0

Answer:

$8.30 million approx

Explanation:

The computation of the present value of the interest tax shield is shown below:

Year                            0                    1                     2                   3                   4

Outstanding debt    $100 million   $75 million   $50 million    $25 million  $0

Less: Interest                                    $10 million    $7.5 million  $5 million    $2.5 million

Less: Tax shield at 40%                   $4 million      $3 million     $2 million    $1 million of interest

Discount factor at 10%                     0.90909       0.82645        0.75131   0.68301

Present value                                   $3.63 million  $2.48 million  $1.50 million  $0.683 million

So, the present value is $8.30 million approx

The discount factor should be computed below  

= 1 ÷ (1 + rate) ^ years

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Ben works at a top accounting firm in Salt Lake City and his responsibilities include developing individual and departmental goa
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4 0
2 years ago
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Option (a) is correct.

Explanation:

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                                                                   = $1,000

A.

(1) Break-even\ in\ rooms=\frac{Fixed\ cost}{contribution\ margin\ per\ marketing\ plan}

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Break even in marketing plan = 400

(2) Break-even in dollars:

= Break-even in marketing plan × Average rate per plan

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(3) Margin of safety = Actual sales - Break-even sales in dollars

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                                = 300,000

Margin\ of\ safety\ ratio=\frac{Margin\ of\ safety}{Actual\ sales}

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B.

(1) Contribution margin per marketing plan = Sales - Variable cost

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Margin\ of\ safety\ ratio=\frac{Margin\ of\ safety}{Actual\ sales}

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Therefore, option (a) would achieve the margin of safety ratio more than 45%.

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