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What will happen to present value of interest tax savings

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Question - MVP Inc., a manufacturing firm with no debt outstanding and a market value of $100 million is considering borrowing $ 40 million and buying back stock. Assuming that the interest rate on the debt is 9% and that the firm faces a tax rate of 35%, answer the following questions:

a. Estimate the annual interest tax savings each year from the debt.

b. Estimate the present value of interest tax savings, assuming that the debt change is permanent.

c. Estimate the present value of interest tax savings, assuming that the debt will be taken on for 10 years only.

d. What will happen to the present value of interest tax savings, if interest rates drop tomorrow to 7% but the debt itself is fixed rate debt?

Reference no: EM132780828

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