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    Value of firms & present value of tax shield

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    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

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    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

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