Doubts

8b - In-class exercise 3c

Re: 8b - In-class exercise 3c

by Julio Crego -
Number of replies: 0
Correct, the PV of the interest tax shield is always:

\(PV(ITS) = t\cdot PV(InterestPayments)\)

In the case of perpetual debt, we use the cost of debt to discount; hence, 

\(PV(ITS) = t\cdot \dfrac{InterestPayment}{r_D} = t\cdot \dfrac{r_D \times D}{r_D} = t\cdot D\)