Question

Herculio Mining has net operating income of $5 million; there is $50 million of debt outstanding with a required rate of return of 6 percent; the required rate of return on the industry is 12 percent; and the corporate tax rate is 40 percent. Assume there are corporate taxes but no personal taxes.
a. Determine the present value of the interest tax shield of Herculio Mining, as well as the total value of the firm.
b. Determine the gain from leverage if personal taxes of 20 percent on stock income and 30 percent on debt income exist.


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  • CreatedMarch 26, 2015
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