33.6
6.Your company is going to issue $10 million in bonds that pay an
8% annual coupon. If your tax rate is 40%, what will the value of
your interest tax shield be each year? (4)
Your interest tax shield is based on the amount of tax you pay each year. Since your interest payments to bondholders are tax deductible, every $1 of interest you pay will save you $0.40 in taxes. Each year you will pay $10M(0.08) = $800,000 in interest. Thus you will save $800,000(.40) = $320,000 in taxes each year. This will be your annual ITS.