Question
Asked Nov 27, 2019
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What is the present value of the tax shield?

Assume that cost of debt = 8%; unlevered cost of capital = 10%; systematic risk of the asset is 1.5.  Assume a 50% debt to equity ratio.

А
В
C
Unlevered Firm Levered Firm
10,000
3,200
6,800
2,312
4,488
3,200
1
2 EBIT
10,000
3 Interest
4 Taxable Income
10,000
3,400
6,600
5 Tax (tax rate: 34%)
6 Net Income
7 CFFA
0
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А В C Unlevered Firm Levered Firm 10,000 3,200 6,800 2,312 4,488 3,200 1 2 EBIT 10,000 3 Interest 4 Taxable Income 10,000 3,400 6,600 5 Tax (tax rate: 34%) 6 Net Income 7 CFFA 0

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Expert Answer

Step 1

Calculation of Present Value of Tax Shield:

The present value of the tax shield is 1,007.41.

Excel Spreadsheet:

...
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