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Ford expects to earn a free cash flow of $100, starting in 1 year, forever. The discount rate on the assets of the firm is
Ford expects to earn a free cash flow of $100, starting in 1 year, forever. The discount rate on the assets of the firm is 18%. Further, Ford has issued debt of $1,000 at an interest rate of 5%. Ford will keep its Debt/Equity ratio fixed, so that as the firm does well (poorly), its level of debt will increase(decrease). The cost of debt and interest rate will remain at 5% no matter how much debt Ford raises. Finally, Ford has a tax rate of 30%. What is the present value of Fords interest tax shield?
a. 15
b. 83
c. 0
d. 300
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