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.

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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, of debt and buy back 18, 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, minimizes WACC (8.57%) maximizes the value of the firm ($547, ) 4