Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table.
Table1: Information of the firms

Unlevered firm 
Levered firm 
EBIT 
10000 
10000 
Interest 
0 
3200 
Taxable income 


Tax (tax rate: 34%) 


Net income 


CFFA 


Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5
The required values are mentioned in below table:
Unlevered firm will have zero tax shield as no interest on debt is paid.
In order to calculate the present value of tax shield, cost of capital should be known. Assume the weights for equity and debt is 50:50.
The cost of capital is calculated below:
The present value of tax shiel...
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