The Jack and Tyler Pizza Company is financed entirely with equity and has grown very quickly over the past 8 years. The firm has hired the consulting firm of Stephanie and Chiara LLC to analyze the firm's financing. The consulting firm recommends that the firm borrow $100 million (market value) in perpetual riskless debt at (the current market interest of) 10% and buy back $100 million in equity. The founders, a team of brothers who know pizzas very well, but not finance, explain that taking on debt would reduce earnings available to equity each year by the amount of interest, thus reducing the value of the equity's claim, and therefore would not benefit the shareholders, most of whom are family and friends. Analyze the founder's argument and compute the value of the debt tax shield proposed by Stephanie and Chiara assuming equity taxation (T[E]) is at 14%, dividends (T[D]) are taxed at 28%, and corporate taxes (T[C]) are 34%.

Do this in three steps:

a. Compute Vu

b. Compute Vl

c. Explain the difference between Vu and Vl.

Answer rating: 100% (QA)

The Jack and Tyler Pizza Company is considering a new threeyear expansion project The key data are shown below The company hired a consulting firm to ... View the full answer