Tax shield value
Hi,
Unlevered firm value (FVu) is generally agreed to be equal to levered firm value (FVl) - tax shield value (VTS). So FVl is greater than FVu, thanks to tax benefits. Ultimately, this greater value (VTS) benefits to shareholders (as debtholders revenue is generally fixed, idem for preferred stock holders). This means equity value is greater when existing VTS.
If this is all correct, then I would have 2 questions: - VTS adds up to equity on L&E side, would it be considered as a tax debtor on asset side, to get equilibrium? - By default, is VTS already included in equity (hence we focus on levered values)? If not it would mean by default we whether focus on unlevered values or consider tax shield as null in balance sheet equilibrium.
Thank you
Not trying to be a douche here, but this forum isn't meant for homework questions. Getting one every so often is ok, but if we allow them then we'll set the precedent for becoming a homework forum for finance.
Value of interest tax shield (Originally Posted: 02/25/2015)
Hi, im struggling with an assigment and was wondering if anybody out there could help me.
WACC=15% Perpetual and constant EBITDA equal 3,100,000 (the assets are fully depreciated) Unlevered RoE=22,53% Constant D/E ratio Tax rate=25%
Im having a tough time understanding how to calculate the interest tax shield, because the amount of debt is not given, and im not quite sure how to do this.
Wrong forum. This is business school barrage.
Valuing interest-induced tax shield savings (Originally Posted: 10/25/2015)
When valuing debt/interest induced tax shield savings (assuming perpetual debt level), do I discount the tax savings by the WACC, Cost of Equity, or Risk free rate (for which I'm using 10 year treasury rate)?
Thanks in advance.
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