Question
Cavo Corporation expects a net income of $175,000 every year forever and all of the net income will be paid to shareholders as dividends. The
Cavo Corporation expects a net income of $175,000 every year forever and all of the net income will be paid to shareholders as dividends. The company currently has no debt but is planning to issue $120,000 perpetual debt. The interest rate on this debt is 10%. Its cost of equity is 20%. Its corporate tax rate is 35%.
What is the current value (before the debt issuing) of the company?
How much is the annual tax saving and the present value of the tax shield?
How much will be the firm value after this change in capital structure?
How much will be the value of debt and equity, respectively, after this change in capital structure?
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Countering Terrorist Finance A Training Handbook For Financial Services
Authors: Tim Parkman, Gill Peeling
1st Edition
0566087251, 978-0566087257
