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15 Sep 2018

Why is it important to calculate the value of the interest tax shield if a firm adjusts its debt annually to a target level?

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Deanna Hettinger
Deanna HettingerLv2
18 Sep 2018

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Why is it important to calculate the value of the interest tax shield if a firm adjusts its debt annually to a target level?

Which of the following statements is false? The optimal level of debt D*, balances the costs and benefits of leverage. If the debt level is too large firm value is reduced due to the loss of tax benefits (when interest exceeds EBIT), financial distress costs, and the agency costs of leverage. As the debt level increases, the firm faces worse incentives for management, which increase wasteful investment and perks As the debt level increases, the firm benefits from the interest tax shield (PV of interest tax shield isTc xD). (Tc= marginal corporate tax rate)

Braxton Enterprises currently has debt outstanding of $50 million and an interest rate of 7%. Braxton plans to reduce its debt by repaying $10 million in principal at the end of each year for the next five years. If​ Braxton's marginal corporate tax rate is 30%​, what is the interest tax shield from​ Braxton's debt in each of the next five​ years?

The interest tax shield in year one is $___million. ​ (Round to three decimal​ places.)

The interest tax shield in year two is ___million.  ​ (Round to three decimal​ places.)

The interest tax shield in year three is ___ million.   ​(Round to three decimal​ places.)

The interest tax shield in year four is $ ____million. ​(Round to three decimal​ places.)

The interest tax shield in year five is ___ million. ​ (Round to three decimal​ places.)

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