eBook Problem Walk-Through

Tax Shield Value

Wilde Software Development has a 13% unlevered cost of equity. Wilde forecasts the following interest expenses, which are expected to grow at a constant 2% rate after Year 3. Wilde's tax rate is 25%.

	Year 1	Year 2	Year 3
Interest expenses	$75	$100	$130

1. What is the horizon value of the interest tax shield? Do not round intermediate calculations. Round your answer to the nearest cent.

   $

2. What is the total value of the interest tax shield at Year 0? Do not round intermediate calculations. Round your answer to the nearest cent.

   $