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PV of the interest tax shields, gains from using leverage

1) If a firm has $7.4 million in debt, $22.4 million in equity, a tax rate of 34%, and pays 6% interest on debt, what is the firm's PV of the interest tax shields?

a. $444,000
b. $150,960
c. $15 million
d. $2.516 million
e. $456,960

2) What do you need to know to calculate the gains from using leverage for individual companies?

a. tax rate on corporate profits
b. market value of a firm's outstanding debt
c. personal tax rate on income from debt
d. personal tax rate on income from stock
e. all of the above

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Solution This solution is FREE courtesy of BrainMass!

1) If a firm has $7.4 million in debt, $22.4 million in equity, a tax rate of 34%, and pays 6% interest on debt, what is the firm's PV of the interest tax shields?

a. $444,000
b. $150,960
c. $15 million
d. $2.516 million
e. $456,960
Answer: d. $2.516 million
PV of Tax shield = Tax rate x Debt = 34% x $7.4 million = $2.516 million

2) What do you need to know to calculate the gains from using leverage for individual companies?

a. tax rate on corporate profits
b. market value of a firm's outstanding debt
c. personal tax rate on income from debt
d. personal tax rate on income from stock
e. all of the above

Answer:
a. tax rate on corporate profits

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