Assume the M&M with corporate taxes. The corporate tax rate is 40%. Your firm is currently unlevered with 100% equity. As of

Question

2 years ago

9

Assume the M&M with corporate taxes. The corporate tax rate is 40%. Your firm is currently unlevered with 100% equity. As of

now, the value of the firm’s equity is $400K, and the firm’s cost of capital is 10%. Assume that your firm can borrow at 4% from a bank. Suppose that you decided to lever up by reducing equity and increasing debt. As the result, your firm now has $250K in debt. Your firm plans to maintain this debt amount forever. What is the present value of the interest tax shield?

Business

1 answer:

Fynjy0 [20] · Answer 1 · 2022-05-17T04:22:47+03:00

Fynjy0 [20]2 years ago

7 0

Answer:

The present value of the interest tax shield is $100.

Explanation:

Present Value of interest tax Shield= Debt* Tax Rate

=$250*40%

=$100