A local firm has debt worth $200,000,with a yield of 9%,and equity worth $300,000.It is growing at a 5% rate,and its tax rate is 40%.A similar firm with no debt has a cost of equity of 12%.Under the MM extension with growth,what is the value of your firm's tax shield,i.e.,how much value does the use of debt add?
A) $92,571
B) $102,857
C) $113,143
D) $124,457
E) $136,903

Question

Quizplus · Accepted Answer

The value of the tax shield is calculated as the tax rate multiplied by the debt amount: 0.40 * $200,000 = $80,000. However, under the MM extension with growth, the value of the tax shield is adjusted for growth: $80,000 / 0.09 = $888,889. The present value of the tax shield is then $888,889 * 0.05 = $44,444. Adding this to the initial tax shield gives $80,000 + $44,444 = $124,444, which is closest to option B.

A Local Firm Has Debt Worth $200,000,with a Yield of 9%,and