Question

Lannion Co. is a manufacturing firm with no debt outstanding. It is considering borrowing $25 million at 8 percent and using the proceeds to buy back shares. Its equity market value is $100 million, and its profits are taxed at 35 percent.
a. What would be the present value of the interest tax shield if the debt is permanent? If it matures in five years?
b. What would be the present value of the interest tax shield if the interest rate increases to 9 percent immediately after the debt is issued?


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  • CreatedMarch 27, 2015
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