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A company has an un-leveraged value of 3,000,000 and debt 300,000. If the company is subject...

A company has an un-leveraged value of 3,000,000 and debt 300,000. If the company is subject to a corporate tax rate of 0.30, and investors in the company are subject to a tax rate of 0.05 on equity income and 0.10 on debt income, what is the company's value

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Expert Solution

The key to solving this question is understanding the fact that interest tax shield benefit calculations for a firm are done at that firm's corporate tax rate. The tax rates applicable to the investors' equity and debt income is irrelevant.

Unlevered Value = $ 3 million, Relevant Tax Rate = 0.3 or 30 % and Debt = $ 300000

PV of Interest Tax Shield = 300000 x 0.3 = $ 90000

Total Firm Value = 3000000 + 90000 = $ 3090000

jeff jeffy answered 2 years ago
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