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Value of firms & present value of tax shield

Given the following information, calculate the market value of E Corporation, D Corporation, and the present value of the tax shield to D Corporation if both companies have a tax rate of 40%.

Assume there are no agency costs or financial distress and that the expected growth of EBIT is zero.

E Corporation:

cost of equity = 12%

debt = 0

pretax cost of debt = 0

EBIT = $500,000

D Corporation:

cost of equity = 18%

debt = $2,500,000

pretax cost of debt = 8%

EBIT = $500,000

Solution Preview

** The detailed answers are in the Excel file which has been attached. **

Given the following information, calculate the market value of E Corporation, D Corporation, and the present value of the tax shield to D Corporation if both companies have a tax rate of 40%. Assume there are no agency costs or financial distress and that the expected growth of EBIT is zero.
E Corporation:
cost of equity = 12%
debt = 0
pretax cost of debt = 0
EBIT = $500,000
D Corporation:
cost of ...

Solution Summary

Questions on Market value & present value of tax shield.

$2.19