Assume a Modigliani and Miller (MM) world with corporate taxes. Spaghetti manufacturing company Taxfraudulini (TF) is expected to have free cash flow in the coming year of $10 million, and this free cash flow is expected to grow at a rate of 3% every year thereafter. TF has an equity cost of capital of 11%, a debt cost of capital of 8%, and pays a corporate tax rate of 35%. If TF currently maintains a debt-to-equity ratio of 3, then the present value of TF’s interest tax shield will be closest to ?

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In a Modigliani and Miller MM world with corporate taxes the value of a firm is given by V U PVinte... View the full answer