Question

he Telescoping Tube Company is planning to raise $2,500,000 in perpetual debt at 11% to finance part of their expansion. They have just received an offer from the Albanic County Board of Commissioners to raise the financing for them at 8% if they build in Albanic County. What is the total added value of debt financing to Telescoping Tube if their tax rate is 34% and Albanic raises it for them

Answer 1

$1,300,000

Step-by-step explanation:

Total added value of debt = $2,500,000 - [0.08*($2,500,000)*(1 - 0.34)] /0.11

Total added value of debt = $2,500,000 - ($200,000(0.66))/0.11

Total added value of debt = $2,500,000 - $132,000/0.11

Total added value of debt = $2,500,000 - $1,200,000

Total added value of debt = $1,300,000