Question

Braxton Enterprises currently has debt outstanding of

$ 65$65

million and an interest rate of

9 %9%.

Braxton plans to reduce its debt by repaying

$ 13$13

million in principal at the end of each year for the next five years. If​ Braxton's marginal corporate tax rate is

22 %22%​,

what is the interest tax shield from​ Braxton's debt in each of the next five​ years?

Answer 1

Solution

Value of Tax Shield = Amount of Interest * Applicable Tax rate.

Year	Opening Balance	Interest @9%	Repayment	Closing Balance	Tax Shield
						1	65.00	5.85	13.00	52.00	1.29
2	52.00	4.68	13.00	39.00	1.03
3	39.00	3.51	13.00	26.00	0.77
4	26.00	2.34	13.00	13.00	0.51
5	13.00	1.17	13.00	-	0.26
					3.86
	* All Amounts in Millions