Your firm currently has 88 million in debt outstanding with a 9%interest rate, The terms of the loan require the firm to repay 22million of the balance each year. Suppose that the marginalcorporate tax rate is 40% and that the interest tax shields havethe same risk as the loan. What is the present value of theinterest tax shields from this debt.
The present value of this interest tax shield is
Your firm currently has 88 million in debt outstanding with a 9%interest rate, The terms of the loan require the firm to repay 22million of the balance each year. Suppose that the marginalcorporate tax rate is 40% and that the interest tax shields havethe same risk as the loan. What is the present value of theinterest tax shields from this debt.
The present value of this interest tax shield is
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4. Raymond Supply, a national hardware chain, is considering purchasing a smaller chain, Strauss & Glazer Parts (SGP). Raymond's analysts project that the merger will result in the following incremental free cash flows, tax shields, and horizon values:
| Year | 1 | 2 | 3 | 4 |
| Free cash flow | $1 | $3 | $3 | $7 |
| Unlevered horizon value | 75 | |||
| Tax shield | 1 | 1 | 2 | 3 |
| Horizon value of tax shield | 32 |
Assume that all cash flows occur at the end of the year. SGP is currently financed with 30% debt at a rate of 10%. The acquisition would be made immediately, and if it is undertaken, SGP would retain its current $15 million of debt and issue enough new debt to continue at the 30% target level. The interest rate would remain the same. SGP's pre-merger beta is 2.0, and its post-merger tax rate would be 34%. The risk-free rate is 8% and the market risk premium is 4%. What is the value of SGP to Raymond?
