ABC, Inc is currently an all-equity firm with a firm value of $200,000. The company can borrow at 5%. It is considering adding $20,000 worth of debt in the capital structure and using the proceeds to repurchase equity. Assume a tax rate of 20%. What is the interest tax shield? What is the present value of the interest tax shield? What is new value of the firm after the recapitalization? Why is the value of the levered firm higher than the value of the unlevered firm?

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