KD Industries has 30 million shares outstanding with a market price of $20 per s

Question

KD Industries has 30 million shares outstanding with a market price of $20 per share and no debt. KD has had consistently stable earnings, and pays a 35% tax rate. Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares.

Assuming that the interest income tax is 35% and the average tax on equity income is 15%, calculate the present value of the interest tax shield provided by KD’s recapitalization.

Explanation / Answer

The present value of the interest tax shield is equal to the amount borrowed multiplied by the tax rate. PV of Tax shield = 200 * 35% = 70 million

Related Questions

Navigate

• Browse (All)
• Browse K
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.