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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
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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?

User Andre Kraemer
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Answer:

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

Step-by-step explanation:

Present Value of interest tax Shield= Debt* Tax Rate

=$250*40%

=$100

User Marcoo
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