Consider the M&M world of corporate taxes.The interest expense is $10 million,the corporate tax rate is 20%,and the discount rate on the tax shield is 10%.What is the gain to leverage or the value added from issuing debt?

Question

Quizplus · Accepted Answer

The gain to leverage or the value added from issuing debt is calculated as the present value of the tax shield. The tax shield is the interest expense multiplied by the tax rate, which is $10 million * 20% = $2 million. The present value of the tax shield is $2 million / 10% = $20 million.

Consider the M&M World of Corporate Taxes