Your firm has a tax rate of 40%. Your annual pre-tax income next year is 500,000. Assume that you have an outstanding debt of 1,300,000 with an interest rate of 8%.

How much do you pay in taxes, and what is your after-tax income? How much do you pay in taxes, and what is your after-tax income if you have no debt, i.e. you finance the firm entirely with your own capital (i.e. there is no debt of 1,300,000)? The cost of capital for your firm is 10%.

How much is the firm with debt-financing worth more than the firm financed with own capital? How much do you save in taxes when financing with debt, and what is the present value of the tax savings?