# Interest tax shields With \$50 million in new debt, the present value of the interest tax shields would be – \$50 million x 40% = \$20 million If we count.

## Presentation on theme: "Interest tax shields With \$50 million in new debt, the present value of the interest tax shields would be – \$50 million x 40% = \$20 million If we count."— Presentation transcript:

Interest tax shields With \$50 million in new debt, the present value of the interest tax shields would be – \$50 million x 40% = \$20 million If we count cash as negative debt, then the change in debt is actually \$50 million + \$209 million = \$259 million. The interest tax shields would be – \$259 million x 40% = \$103,600 1

Question #2 2

Unlevered beta calculation 3

Recommendation Based on Modigliani and Miller’s theory on optimal capital structure, the firm should issue \$136,763.20 of debt and buy back 18,689.90 shares – this moves the firm from zero debt to a D/E of 0.21, cost of debt = 5.87%, and a higher cost of equity = 9.62% – benefits of adopting this capital structure: interest tax shield of \$54,705.28 minimizes WACC (8.57%) maximizes the value of the firm (\$547,325.99 ) 4

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