In the MM extension with growth,the appropriate discount rate for the tax shield is the unlevered cost of equity.

Question

Quizplus · Accepted Answer

In the MM extension with growth, the appropriate discount rate for the tax shield is the unlevered cost of equity. This is because the tax shield is related to the interest payments on debt, which are tax deductible. Therefore, the tax shield benefits the equity holders who do not have to pay taxes on that portion of the firm's earnings. The unlevered cost of equity represents the return required by equity holders in a company with no debt, and it is used to discount the tax shield as it is a cash flow accruing to equity holders.

In the MM Extension with Growth,the Appropriate Discount Rate for the Tax