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A triple A rated company borrows $100 millions interest only loan for a 10 year period at fixed rate of 5.5 percent. Assuming the company is in the 35 percent tax bracket.

a) What will be the present value of the tax shield over the ten year period assuming the firm has cost of debt capital of 5 percent and cost of equity capital of 8 percent?

b) What happens to the present value of tax shield if corporate tax rate increases to 40 percent?

c) What happens to the corporate debt v equity policy if Congress cuts corporate tax rate to 25%( assuming it is currently 35%.

Basic Finance, Finance

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