KD Industries has 30 million shares outstanding with a market price of $20 per share and no debt. KD has had consistently stable earnings and pays a 35% tax rate. Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. The present value of KD's interest tax shield is closest to a. $130 million b. $200 million c. $400 million d. $70 million

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
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KD Industries has 30 million shares outstanding with a market price of
$20 per share and no debt. KD has had consistently stable earnings and
pays a 35% tax rate. Management plans to borrow $200 million on a
permanent basis through a leveraged recapitalization in which they
would use the borrowed funds to repurchase outstanding shares. The
present value of KD's interest tax shield is closest to
a. $130 million
b. $200 million
c. $400 million
d. $70 million
Transcribed Image Text:KD Industries has 30 million shares outstanding with a market price of $20 per share and no debt. KD has had consistently stable earnings and pays a 35% tax rate. Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. The present value of KD's interest tax shield is closest to a. $130 million b. $200 million c. $400 million d. $70 million
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