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Prokter and Gramble (PG) has historically maintained a debt-equity ratio of approximately 0.30. An all-equity company, Thomson & Thomson, that belongs to the same industry
Prokter and Gramble (PG) has historically maintained a debt-equity ratio of approximately 0.30. An all-equity company, Thomson & Thomson, that belongs to the same industry as PG has cost of capital equal to 15%. Currently, debt of PG is AAA -rated. Suppose that the risk-free rate is 3%, PG is expected to have free cash flows of $15 billion in perpetuity, and PGs tax rate is 35%. PG believes it can increase debt without any serious risk of distress or other costs. With a higher debt-equity ratio of 0.60, it believes its borrowing costs will rise by 1.50%. Determine the present value of additional tax savings that will be bought about by the new debt
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