Question 1: Your firm currently has $100 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $25 million of the balance each year. Suppose that the marginal corporate tax rate is 40%, and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt?
Question 2: With its current leverage, Impi Corporation will have net income next year of $4.5 million. If Impi's corporate tax rate is 35% and it pay 8% interest on its debt, how much additional debt can Impi issue this year and still receive the benefit of the interest rate tax shield next year?