LFC
03-13-2002, 10:56 PM
hey all, had a question:
Fall 2000 question 49.
I got everything except the PV of Tax Shields..i got:
Tax shields = interest payment * tax
= 45000(.08) * .225
= 810
To get the PV..i thought i should discount at the cost of debt perpetually..which becomes:
PV Tax shields = 810/.08
= 10,125
The solution is something else a lot more complicating..i'm sure its the last paragraph which has stumped me.
thanks in advance.
p.s. when discounting tax shields, do we ALWAY use the cost of debt or the after-tax borrowing rate?
Fall 2000 question 49.
I got everything except the PV of Tax Shields..i got:
Tax shields = interest payment * tax
= 45000(.08) * .225
= 810
To get the PV..i thought i should discount at the cost of debt perpetually..which becomes:
PV Tax shields = 810/.08
= 10,125
The solution is something else a lot more complicating..i'm sure its the last paragraph which has stumped me.
thanks in advance.
p.s. when discounting tax shields, do we ALWAY use the cost of debt or the after-tax borrowing rate?