Walsall Albion Co. currently has a debt-to-equity ratio of 0.35 and a total market value of €200 million. the company believes that increasing leverage (by taking on debt and repurchasing an equal euro amount of shares) will increase firm value; consequently, they have set a target debt-to-equity ratio of 0.6, which they plan to maintain permanently. If the marginal tax rate is 30%, then present value of the tax shield it will create?
Walsall Albion Co. currently has a debt-to-equity ratio of 0.35 and a total market value of €200 million. the company believes that increasing leverage (by taking on debt and repurchasing an equal euro amount of shares) will increase firm value; consequently, they have set a target debt-to-equity ratio of 0.6, which they plan to maintain permanently. If the marginal tax rate is 30%, then
A tax shield refers to a reduction in taxable income through various deductions. The value of the tax shield can be determined by multiplying the amount of taxable expenses by the tax rate. The tax reduction technique where depreciation is used to reduce the taxable income is referred to as a depreciation tax shield. Under this technique, depreciation expense is subtracted from the taxable income. The depreciation is used as a deductible to reduce the taxable income.
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