Neas-Seminars

Corpfin Mod 17: Homework


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By NEAS - 6/28/2005 2:40:25 PM


Corporate Finance, Module 17

Homework Assignment

(The attached PDF file has better formatting.)

A project with an indefinite life has an initial investment is $10 million.

The opportunity cost of capital is 12% with all-equity financing, the borrowing rate is 8%, and the firm borrows $4 million against the project.

●    The debt is perpetual; it is refinanced each year.
●    The corporate tax rate is 35%.

A.    What is the interest paid in each year?
B.    What is the present value of the debt tax shields if the debt is fixed at $4 million?
C.    If the debt is re-balanced each year to a fixed percentage of the project’s value, is the present value of the debt tax shield higher or lower? Explain why.
By Jim - 2/28/2020 2:42:30 AM


For part C I did
‌WACC = (rD*D*(1-TC)+ rE*E) / (D + E) = (0.08*4,000,000*(1-0.35) + 0.12*6,000,000) / (4,000,000 + 6,000,000) = 0.0928
which is higher than the borrowing rate of 8% so the tax sheild will go up
Am I correct?

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