What is the value of the tax shield if the value of the firm is Rs.5 million, its value if unlevered would be Rs.4.78 million, and the present value of bankruptcy and agency costs is Rs.360,000?
Answers
The value of the tax shield is $580,000
Explanation:
The formula and the computation of the value of the tax shield is shown below:
Value of the firm= Value of unlevered + value of the tax shield - (Present value of Bankruptcy + Agency costs)
$5,000,000 = $4,780,000 + value of the tax shield - $360,000
$5,000,000 = $4,420,000 + value of the tax shield
So, the value of the tax shield is
= $5,000,000 - $4,420,000
= $580,000
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What is levered and unlevered beta and which one is used in the capm model
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Amount of tax shield = Rs. 580,000
Explanation:
Given:
Value of firm = Rs.5,000,000
Unlevered value = Rs. 4,780,000
Present value of bankruptcy = Rs. 360,000
Find:
Amount of the tax shield
Computation:
Amount of the tax shield = Value of firm - Unlevered value + Present value of bankruptcy
Amount of the tax shield = 5,000,000 - 4,780,000 + 360,000
Amount of the tax shield = 580,000
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