Calculation Of Interest Expense Tax Shield

Question

Consider a firm with this book value capital structure:

Interest‐Bearing Debt =                       $3,500

Common Stock Equity* =                     14,000

Financing Capital =                             $17,500

*Market Value of Common Stock =        $9,500.

Assume the interest‐bearing debt, which is publicly‐traded, has no maturity date and a coupon rate of interest of 8%. Assume due to either changing financial market conditions or changing perceptions about your firm’s default risk, the debt currently trades in the financial market at a market rate of interest of 12.5%. If your firm’s corporate income tax rate is 35%, what are (a) the present value of your firm’s interest expense tax shield and (b) the unlevered market value of your firm?

Summary

The question belongs to Finance and it discusses about calculating the present value of interest expense tax shield and unlevered market value of a firm.

Total Word Count 90