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skelet666 [1.2K]
2 years ago
11

LCMS Industries has $70 million in debt outstanding. The firm will pay only interest on this debt (the debt is perpetual). LCMS'

marginal tax rate is 35% and the firm pays a rate of 8% interest on its debt. The present value of LCMS' interest tax shield is closest to:_________
Business
1 answer:
egoroff_w [7]2 years ago
6 0

Answer:

$24.5 million

Explanation:

Calculation for The present value of LCMS' interest tax shield

Using this formula

Present Value of Tax shield = Debt outstanding× Marginal tax rate

Let plug in the formula

Present Value of Tax shield=$70 million× .35

Present Value of Tax shield=$24.5 million

Therefore The present value of LCMS' interest tax shield is closest to: $24.5 million

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Hi, first we have to change the fixed rate in terms of an effective monthly rate, which is 1% effective monthly (12% nominal interest/12 =1% effective monthly). After that, take into account that the property is going to be paid in 30 years, but since the payments are going to be made in a montlhly basis, we have to turn years into months (30 years * 12 = 360 months).

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