SoonerCo has $15 million of common stock outstanding, earnings before interest and taxes (EBIT) of $2.5 million

Question:

SoonerCo has $15 million of common stock outstanding, earnings before interest and taxes (EBIT) of $2.5 million per year, and $15 million of debt outstanding with a required return (interest rate) of 8%. The required rate of return on assets in this industry is 12%, and the corporate tax rate is 35%. Within the M&M framework of corporate taxes but no personal taxes, determine the present value of the interest tax shield of SoonerCo as well as the firm’s total value. Finally, determine the gain from leverage if there are personal tax rate of 15% on stock income and 25% on debt income.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on...