The present value of tax shield is 4.2 million.
Given perpetual debt is of $20 million, coupon rate is 8% and tax rate is 21%
Present value of the tax shield is to be computed.
A tax shield is a decrease in taxable income accomplished by claiming permitted deductions such as mortgage interest, medical expenditures, charitable contributions, amortization, and depreciation.
A tax shield is a deduction that taxpayers can use to reduce their taxable income. Tax shelters include charity donations, mortgage deductions, medical costs, and depreciation.
The formula to compute the tax shield is given below:
Tax shield = Debt * tax rate
=20 million *21%
=4.2 million
Therefore, the tax shield is 4.2 million.
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