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What is the present value of the interest tax shield that is created by the new subordinated notes? What is the present value of the
What is the present value of the interest tax shield that is created by the new subordinated notes?
1.1 Some observations This example includes several important insights. 1. The market value of the firm assets did not depend on how they were financed. When D/E-1 or D/E 5 the value of the firms assets are still $300. This should not be surprising. The assets did not change at all why would their value change? 2. Before the new losn we can solve for the expected return to equityholders using the WACC formula. D+ E ,D+E D+E D+E D+E In our context this means that before the leveraged rocap the expocted return on equity, TE was 10% + ( 1 0%-5%) x 1-15%. After the recap 10% + ( 10%-5%) x 5-35%, as you can see adding debt increases shareholders required return. Why? there is greater likelihood of bankruptey resulting in sharcholders will get nothing. did not change at all, thus ra does not change. So while adding debt makes equity riskier, it does not affeet the risk of the asscts. 3. While adding debt makes oquity riskier it does not change the risk of the asscts. The asscts 1.1 Some observations This example includes several important insights. 1. The market value of the firm assets did not depend on how they were financed. When D/E-1 or D/E 5 the value of the firms assets are still $300. This should not be surprising. The assets did not change at all why would their value change? 2. Before the new losn we can solve for the expected return to equityholders using the WACC formula. D+ E ,D+E D+E D+E D+E In our context this means that before the leveraged rocap the expocted return on equity, TE was 10% + ( 1 0%-5%) x 1-15%. After the recap 10% + ( 10%-5%) x 5-35%, as you can see adding debt increases shareholders required return. Why? there is greater likelihood of bankruptey resulting in sharcholders will get nothing. did not change at all, thus ra does not change. So while adding debt makes equity riskier, it does not affeet the risk of the asscts. 3. While adding debt makes oquity riskier it does not change the risk of the asscts. The asscts What is the present value of the interest tax shield that is created by the bank loan? Assume that year 0 is the end of the year 1988.
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