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Problem:

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?

Additional Information:

This question is basically belongs to Finance as well as it explains about calculating the present value of interest expense tax shield and unlevered market value of a firm.

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