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Interest tax shields

Interest tax shields. With $50 million in new debt, the present value of the interest tax shields would be $50 million x 40% = $20 million If we count cash as negative debt, then the change in debt is actually $50 million + $209 million = $259 million. The interest tax shields would be

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Interest tax shields

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  1. Interest tax shields • With $50 million in new debt, the present value of the interest tax shields would be • $50 million x 40% = $20 million • If we count cash as negative debt, then the change in debt is actually $50 million + $209 million = $259 million. The interest tax shields would be • $259 million x 40% = $103,600

  2. Question #2

  3. Question #2 Unlevered beta calculation

  4. Recommendation Based on Modigliani and Miller’s theory on optimal capital structure, the firm should issue $136,763.20 of debt and buy back 18,689.90 shares • this moves the firm from zero debt to a D/E of 0.21, cost of debt = 5.87%, and a higher cost of equity = 9.62% • benefits of adopting this capital structure: • interest tax shield of $54,705.28 • minimizes WACC (8.57%) • maximizes the value of the firm ($547,325.99 )

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