A firm has the following book-value balance sheet; Debt =$ 13 ,000, Common Stock

Question

A firm has the following book-value balance sheet; Debt =$ 13 ,000, Common Stock ($1 par)= 5 and Retained Earnings = $ 17 ,000. The book value of assets is the total of Debt, Common Stock and Retained Earnings. The firm's bonds are currently selling at par and the firm's stock is currently selling for $ 14 . The firm's tax rate is 37 %. What is the value of the firm's tax shield (i.e. the change in firm value due to the use of leverage in the capital structure)? Show your answer to the nearest $1.

Explanation / Answer

For a perpetual debt, the value of firm's tax sheild will be= debt amount * tax rate

=>$13,000 * 37%

=>$4,810.

Therefore, for the given case, value of firm's tax sheild will be $4,810.

Related Questions

Navigate

• Browse (All)
• Browse A
• Subjects

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