You joined a Fortune 500 company as a financial manager. Assume that the company has a market value of £30 billion, £1 billion of short-term debt, and very little long-term debt. Also, assume that debt can be issued at a rate of 8% and the corporation’s income tax rate to be 35%. How can you demonstrate whether the interest tax shields contribute to the value of shareholders’ equity? Explain your steps.

Answer rating: 100% (QA)

A suitably quantified value of the interest tax shield increases the value of the business and thus the shareholder value High business value predeter... View the full answer