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In a two state economy with equally likely states in one years time and with risk free rate 5 % , you have an investment
In a two state economy with equally likely states in one years time and with risk free rate you have an investment project with initial investment cost of $ and endofyear payo of $ or $ in the good and bad state, respectively. The risk premium of the project is a Assume that corporate taxes are levied at a rate c on the di erence between the nal payo and initial investment cost. If debt is issued with a face value of $ at a rate, determine the interest tax shield and the WACC. b Under the same assumption on corporate taxes c if debt is issued with a face value of $ and interest at the interest tax shield is lost in case of default because no interest is due. Determine the expected interest tax shield and the WACC under these conditions. Determine the resulting spread between the yield to maturity on corporate debt and the risk free rate credit spreadc In addition to the assumptions in question a assume that personal income taxes are levied at a rate on interest payments i Determine the net interest tax shield and the WACC. e d How would the answer in c change if we considered also a personal tax rate, of on equity payments?
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