€100,000 10-year loan with maturity in 10 years and interest rate of 6%. Debt is to be paid 20% in 2 years, 30% in 7 years and the remaining at maturity. Perpetual bond (zero-coupon) with an implied yield of 5%.

€100,000 10-year loan with maturity in 10 years and interest rate of 6%. Debt is to be paid 20% in 2 years, 30% in 7 years and the remaining at maturity. Perpetual bond (zero-coupon) with an implied yield of 5%.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 14P

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Production Budget

A budget can be defined as a financial plan designed by an undertaking for a definite period in the future that can contribute towards enhancing the financial success of the business undertaking. It is used to estimate the revenue and expenses. The budget generally takes into account both current and future income and expenses.

Question

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Considering a corporate tax rate of 20%, compute the present value of interest tax shields generated by the following types of debt:

€100,000 10-year loan with maturity in 10 years and interest rate of 6%. Debt is to be paid 20% in 2 years, 30% in 7 years and the remaining at maturity.
Perpetual bond (zero-coupon) with an implied yield of 5%.
5-year loan with maturity in 5 years, interest rate of 5% and constant annual payments.

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