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NARA [144]
3 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]3 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

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1 year ago
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