Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

You are the Chief Financial Officer of LVMH, and you are analyzing the impact of a new loan on the firms value. Assume that the

You are the Chief Financial Officer of LVMH, and you are analyzing the impact of a new loan on the firms value. Assume that the company has just borrowed $10 billion in debt by issuing a perpetual bond (assumption made for simplicity). The firm will pay interest only on this debt. The marginal corporate tax rate is expected to be 20% for the foreseeable future.

Suppose LVMH pays interest of 2% per year on its debt. What is its annual interest tax shield?

The annual interest tax shield is $[a] billion. (Round to two decimal places.)

Everything else being equal, what is the impact of the new loan on the firms value? (Assume the risk associated to the tax shield is the same as the loan)

The new loan (increases/decreases?) [b] the theoretical value of the firm by $[c] billion.

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Personal Finance QuickStart Guide

Authors: Morgen Rochard

1st Edition

1945051019, 978-1945051012

More Books

Students also viewed these Finance questions

Question

c. What were you expected to do when you grew up?

Answered: 1 week ago

Question

d. How were you expected to contribute to family life?

Answered: 1 week ago

Question

e. What do you know about your ethnic background?

Answered: 1 week ago