Question

Assume that Microsoft has no debt, a total market value of $300 billion, and a marginal tax rate of 21%. If it permanently changes its leverage from no debt by taking on new debt in the amount of 13% of its current market value, what is the present value of the tax shield it will create

Answer 1

The presence value of tax shield is =522,000,000

What is Tax shield?

Tax shields is calculate by substraction cash flow form two different sessions.

To determine the present value for first session

Market value = $300 billion

Tax rate = 20%

Debt = 0

Tax payable= Tax rate/100% * Market Value

Tax payable = 20/100× $300 billion

= 600,000,000

To get present value of tax

Market value = $300 billion

Tax rate = 20%

Debt = 13% of $300 billion

= 390,000,000

Present Market Value = $300 billon - 390,000,000

= 2,610,000,000 i.e $2.6billion

Tax payable = 20/100 × $2.6 billion

=522,000,000

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