I would normally know how to solve it$.$ However, the fact that the interest is carried forward makes it hard.

The teacher gave us this as help:

P$3\mathrm{.}10$ Measuring the Effect of Interest Deduction Limitations. EBIT and Interest Cap

Actual Actual Forecast Forecast Forecast Forecast Forecast

Financial Accounting $($Income Statement Excerpt$)$ Year $-1$ Year $0$ Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

Earnings Before Interest and Taxes $ $1,0002,000$ $ $8,000$ $ $40,000$ $ $60,000$ $ $80,000$ $ $90,000$

Interest Expense $($Current$)8,0008,0008,0008,0008,0008,0008,000$ Earnings Before Income Taxes $ $-7,000$ $ $-6,000$ $ $0$ $ $32,000$ $ $52,000$ $ $72,000$ $ $82,000$ Interest Deduction Cap $300$ $ $600$ $ $2,400$ $ $12,000$ $ $18,000$ $ $24,000$ $ $27,000$ Calculation of the Company$$s Taxable Income

Actual Actual Forecast Forecast Forecast Forecast Forecast

Levered Company $($Taxable Income$)$ Year $-1$ Year $0$ Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

Earnings Before Interest and Taxes $ $1,000$ $ $2,000$ $ $8,000$ $ $40,000$ $ $60,000$ $ $80,000$ $ $90,000$

Pre$-$Valuation Interest Carryforward $06002,40012,00070000$

Post$-$Valation Interest Carryforward $0016,0006,7000$

Interest Expense $($Current$)3000001,3008,0008,000$

Taxable Income

Income Taxes $1402801,1205,6008,40013,06016,400$

Earnings $ $560$ $ $1,120$ $ $4,480$ $ $22,400$ $ $33,600$ $ $52,240$ $ $65,600$

Average Tax Rate $20\%20\%20\%20\%20\%20\%20\%$

Pre$-$Valuation Interest Carryforward Balance Year $-1$ Year $0$ Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

Beginning Interest Carryforward $ $0$ $ $7,700$ $ $15,100$ $ $12,700$ $ $700$ $ $0$ $ $0$

Change in Interest Carryforward $7,7007,400-2,400-12,000-70000$

Ending Interest Carryforward $ $7,700$ $ $15,100$ $ $12,700$ $ $700$ $ $0$ $ $0$ $ $0$

Post$-$Valuation Interest Carryforward Balance Year $-1$ Year $0$ Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

Beginning Interest Carryforward $ $0$ $ $8,000$ $ $16,000$ $ $6,700$ $ $00$

Change in Interest Carryforward $8,0008,000-9,300-6,7000$

Ending Interest Carryforward $ $8,000$ $ $16,000$ $ $6,700$ $ $0$ $ $0$

Calculation of the Company$$s Unlevered Taxable Income, Interest Tax Shield, and Implied Tax Rate for Interest Actual Actual Forecast Forecast Forecast Forecast Forecast

Unlevered Company $($Taxable Income$)$ Year $-1$ Year $0$ Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

Earnings Before Interest and Taxes

Pre$-$Valuation Interest Carryforward

Interest Expense $($Current$)3000$ Taxable

Income Taxes

Earnings

Average Tax Rate

Pre$-$Valuation Interest Carryforward Balance

Year $-1$ Year $0$ Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

Beginning Interest Carryforward

Change in Interest Carryforward

Ending Interest Carryforward

Interest Tax Shield:

Income Taxes $($Unlevered Firm

Income Taxes $($with Interest Deduction

Interest Tax Shield

Implied Income Tax Rate for Interest Tax Shields

Year $1$ Year $2$ Year $3$ Year $4$ Year $5$ Interest Tax Shield

Interest Expense $($Current$)$

Implied Income Tax Rate for Interest Tax Shields $0\mathrm{.}00\%0\mathrm{.}00\%43\mathrm{.}25\%36\mathrm{.}75\%20\mathrm{.}00\%$

Comparison Interest Tax Shield Using Marginal Tax Rate x Interest

Year $1$ Year $2$ Year $3$ Year $4$ Year $5$

Interest Expense $($Current$)$

Marginal Income Tax Rate

Interest Tax Shield Using Marginal Tax Rate x Interest

Correct Interest Tax Shield $003,4602,9401,600$

Overstated $($Understated$)$ Interest Tax Shield $ $1,600$ $ $1,600$ $ $-1,860$ $ $-1,340$ $ $0$

Problem $6\mathrm{.}4$

$($Dollars in millions$)$ Growth WACC Year $1$ Year $2$ Year $3$ Firm Value Growth Rate

Comparable Company $110\mathrm{.}50\%$ $$2,000\mathrm{.}0$ $$2,400\mathrm{.}0$ $$2,600\mathrm{.}0$ $$30,000\mathrm{.}02\mathrm{.}38\%$