1. Determine the present value of the interest tax shield of Shop Right Plc as well as the total value of the firm 2. Determine the gain from leverage, if personal taxes off 10% on share income and 35% on debt income exists

1. Determine the present value of the interest tax shield of Shop Right Plc as well as the total value of the firm 2. Determine the gain from leverage, if personal taxes off 10% on share income and 35% on debt income exists

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter22: Providing And Obtaining Credit

Section: Chapter Questions

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Question

Shop Right Plc has earnings before interest and tax (EBIT) GHC10 million and there is GHC60 million of debt outstanding with a required rate of return 6.5%. The required rate of return on the industry is 10% and corporate tax is 30%. Assume there are corporate taxes but no personal taxes.

Required:

1. Determine the present value of the interest tax shield of Shop Right Plc as well as the total value of the firm

2. Determine the gain from leverage, if personal taxes off 10% on share income and 35% on debt income exists

Definition Definition Percentage gain or loss from a specific investment over time. The rate of return is the difference between the closing and initial values of an investment divided by the initial value of the investment. The closing value includes any intermediate cash flows such as dividends or interest amounts.

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