Question
Toms Trucking, Inc. (TTI) is currently all-equity financed, with rE = 10%. They are considering adding $25 million in debt. They anticipate a cost of
Toms Trucking, Inc. (TTI) is currently all-equity financed, with rE = 10%. They are considering adding $25 million in debt. They anticipate a cost of debt of 5%. Calculate the present value of the tax shield associated with this debt financing under the following assumptions:
1) Debt will be kept outstanding at a fixed level perpetually, tc = 35%, ignore personal taxes.
2) Debt will be kept outstanding perpetually, but TTI will adjust their debt level to maintain their current D/V ratio, tc = 35%, ignore personal taxes.
3) Debt will be kept outstanding at a fixed level for only 10 years, tc = 35%, ignore personal taxes.
4) Debt will be kept outstanding at a fixed level perpetually, tc = 35%, ti = 35%, te = 15%.
5) Debt will be kept outstanding at a fixed level for only 10 years, tc = 35%, ti = 35%, te = 15%.
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