You have been asked to compute the monetary value of the tax benefits from existing debt for Deutsche Steel, a German firm. The firm has 2 billion Euros in debt outstanding with an interest rate of 7%. The corporate tax rate for the firm is currently 30%.

What is the annual interest expense in billions?

Answer for part 1

What is the annual interest tax savings in billions?

Answer for part 2

Assuming perpetual debt, estimate the present value of tax benefits from debt in billions.

Answer for part 3

Now assume that personal taxes are also a relevant consideration, and you find that the personal tax on equity income is 10% for Deutsche shareholders and the personal tax rate on debt interest is 30% for Deutsche bondholders. Using this additional information, estimate the present value of tax benefits from debt in billions(again assuming an infinite life for the debt).

Answer for part 4

If the value of Deutsche Steel, when unlevered is 5 billion, what is the value of Deutsche Steel under Miller's model in billions?

Answer for part 5

According to your answer in the previous section, is debt good or bad? if debt is good, print 1 in the answer box. If debt is bad, print 2 in the answer box