ABB Plc will generate a cash flow of 2000 before interest and tax in one period from now. The market expects this cash flow to grow at a rate of 3% per year. ABB pic will make no net investments or changes to net working capital. The corporate tax rate is 40%. ABB plc will have 5000 of risk free debt in issue. The firm plans to keep a constant debt to equity ratio. Accordingly, on average, debt will also grow by 3% per year. Suppose the annual risk free rate is 5%, while the expected market return is 11% per annum. The asset beta is 1.11.

Even though ABB’s debt is risk free, the future growth of ABB’s is uncertain, so the extra amount of the future interest payments have the same beta as ABB’s assets, what is the present value of ABB’ interest tax shield.

Answer rating: 100% (QA)

Cost of unlevered equity Keu Risk free rate ass... View the full answer