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Tax shield and cost of equity

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I need help with the following Finance questions: Please show me a step-by-step solution.

Juanita's Steak House has $12,000 of (perpetual) debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 34%. What is the present value of the tax shield?

The Tip-Top Paving Co. has a beta of 1.11, a cost of debt of 11% and a debt to value ratio of 0.6. The current risk free rate is 9% and the market rate of return is 16.18%. What is the company's cost of equity capital?

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Solution Summary

The solution has two questions - calculation of present value of debt tax shield and calculation of cost of equity.

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1. The interest cost is 12,000X8%=$960. Due to interest expense, the taxes are lower and this is called the tax shield. The tax shield on interest is ...

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