Based on mampm theory with no tax capital structure doesnt, Ask an Expert

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Based on M&M theory with no tax, capital structure doesn't matter due to homemade leverage. However, no tax is an assumption too strong. Luckily, this assumption can be easily relaxed which lead to M&M theory with tax. M&M theory with tax suggests: the value of the levered firm is equal to the value of the unlevered firm plus tax shield (VL = VU + TC*B).

Please explain why the value of tax shield = TC*B?

Hints: Start from the income statement. Use income statement to calculate the increase in annual cash flow because of the interest payment. And finally use perpetuity to valuation the tax shield.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92368446

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