The definition of interest tax shield and value of tax shield.

Question

Want to see more full solutions like this?

Answer 1

Question

Chapter 17, Problem 1Q

a)

Summary Introduction

To determine: The definition of interest tax shield and value of tax shield.

a)

Expert Solution

Explanation of Solution

The interest tax shield is the amount of cash flow shielded from taxes due to interest tax deductibility. It's the same as rd(D)(T). The tax shield's benefit is the present value of future tax income from interest payment deductibility. The tax shield's value depends on the rate (rTS) used to offset future annual tax shields. In the tax model of the MM, rTS=rd

Because MM assume zero growth, the value of the tax shield is T(D). If growth is constant, then the value of the tax shield is rdTD(1+gL)(rTS−gL). Where rd is the interest rate on the debt and rTS is the discount rate for the tax shield.

b)

Summary Introduction

To determine: The definition of adjusted present value (APV) model.

b)

Expert Solution

Explanation of Solution

The adjusted present-value model discounts expected free cash flows at rTS's unlevered cost of equity and discounts interest tax shields.

c)

Summary Introduction

To determine: The definition of compressed adjusted present value (CAPV) model.

c)

Expert Solution

Explanation of Solution

The condensed modified present-value method discounts expected free cash flows at the unlevered equity cost and also discounted interest tax shields at the unlevered equity cost to determine the value of transactions. It is called the compact APV because there is a discount on the FCF and tax shields at the same price.

d)

Summary Introduction

To determine: The definition of free cash flow to equity model.

d)

Expert Solution

Explanation of Solution

This then reduces the FCFEs to hit the price of capital in operations at the leveraged cost of equity. You apply non-operating capital to the value and you get the equity value. You then apply the price of the loan to the value of the transactions. First, the free cash flow for the equity model, or the residual dividend model, measures FCFE, the free cash flow owned by shareholders. FCFE is less interest in cost-free cash flow plus interest tax shield.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Students have asked these similar questions

What is a problem statement outline? Could you please give seome examples? What are the research questions and methodology? How do they work, please some examples? What is a research framework outline? Please give some examples. What is a Final Research Concept? Please give some example.

Skip Stephens is trying to decide whether it would be wise to consolidate his debt by borrowing funds from Syndicated Lending, a firm that he doesn’t know much about. Syndicated is an Internet lender that doesn’t post much information about the costs of the loans it offers. Some of the additional information Skip has gathered from various sources suggests the Syndicated might use such unethical practices as “bait and switch” to attract customers. Discussion questions: Is there an ethical problem? If so, what is it? What are the implications if Skip borrows from Syndicated? Should Skip borrow from Syndicated?

9-15

Answer 2

Question

Chapter 17, Problem 1Q

a)

Summary Introduction

To determine: The definition of interest tax shield and value of tax shield.

a)

Expert Solution

Explanation of Solution

The interest tax shield is the amount of cash flow shielded from taxes due to interest tax deductibility. It's the same as rd(D)(T). The tax shield's benefit is the present value of future tax income from interest payment deductibility. The tax shield's value depends on the rate (rTS) used to offset future annual tax shields. In the tax model of the MM, rTS=rd

Because MM assume zero growth, the value of the tax shield is T(D). If growth is constant, then the value of the tax shield is rdTD(1+gL)(rTS−gL). Where rd is the interest rate on the debt and rTS is the discount rate for the tax shield.

b)

Summary Introduction

To determine: The definition of adjusted present value (APV) model.

b)

Expert Solution

Explanation of Solution

The adjusted present-value model discounts expected free cash flows at rTS's unlevered cost of equity and discounts interest tax shields.

c)

Summary Introduction

To determine: The definition of compressed adjusted present value (CAPV) model.

c)

Expert Solution

Explanation of Solution

The condensed modified present-value method discounts expected free cash flows at the unlevered equity cost and also discounted interest tax shields at the unlevered equity cost to determine the value of transactions. It is called the compact APV because there is a discount on the FCF and tax shields at the same price.

d)

Summary Introduction

To determine: The definition of free cash flow to equity model.

d)

Expert Solution

Explanation of Solution

This then reduces the FCFEs to hit the price of capital in operations at the leveraged cost of equity. You apply non-operating capital to the value and you get the equity value. You then apply the price of the loan to the value of the transactions. First, the free cash flow for the equity model, or the residual dividend model, measures FCFE, the free cash flow owned by shareholders. FCFE is less interest in cost-free cash flow plus interest tax shield.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 3

Question

Chapter 17, Problem 1Q

a)

Summary Introduction

To determine: The definition of interest tax shield and value of tax shield.

a)

Expert Solution

Explanation of Solution

The interest tax shield is the amount of cash flow shielded from taxes due to interest tax deductibility. It's the same as rd(D)(T). The tax shield's benefit is the present value of future tax income from interest payment deductibility. The tax shield's value depends on the rate (rTS) used to offset future annual tax shields. In the tax model of the MM, rTS=rd

Because MM assume zero growth, the value of the tax shield is T(D). If growth is constant, then the value of the tax shield is rdTD(1+gL)(rTS−gL). Where rd is the interest rate on the debt and rTS is the discount rate for the tax shield.

b)

Summary Introduction

To determine: The definition of adjusted present value (APV) model.

b)

Expert Solution

Explanation of Solution

The adjusted present-value model discounts expected free cash flows at rTS's unlevered cost of equity and discounts interest tax shields.

c)

Summary Introduction

To determine: The definition of compressed adjusted present value (CAPV) model.

c)

Expert Solution

Explanation of Solution

The condensed modified present-value method discounts expected free cash flows at the unlevered equity cost and also discounted interest tax shields at the unlevered equity cost to determine the value of transactions. It is called the compact APV because there is a discount on the FCF and tax shields at the same price.

d)

Summary Introduction

To determine: The definition of free cash flow to equity model.

d)

Expert Solution

Explanation of Solution

This then reduces the FCFEs to hit the price of capital in operations at the leveraged cost of equity. You apply non-operating capital to the value and you get the equity value. You then apply the price of the loan to the value of the transactions. First, the free cash flow for the equity model, or the residual dividend model, measures FCFE, the free cash flow owned by shareholders. FCFE is less interest in cost-free cash flow plus interest tax shield.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 4

Question

Chapter 17, Problem 1Q

a)

Summary Introduction

To determine: The definition of interest tax shield and value of tax shield.

a)

Expert Solution

Explanation of Solution

The interest tax shield is the amount of cash flow shielded from taxes due to interest tax deductibility. It's the same as rd(D)(T). The tax shield's benefit is the present value of future tax income from interest payment deductibility. The tax shield's value depends on the rate (rTS) used to offset future annual tax shields. In the tax model of the MM, rTS=rd

Because MM assume zero growth, the value of the tax shield is T(D). If growth is constant, then the value of the tax shield is rdTD(1+gL)(rTS−gL). Where rd is the interest rate on the debt and rTS is the discount rate for the tax shield.

b)

Summary Introduction

To determine: The definition of adjusted present value (APV) model.

b)

Expert Solution

Explanation of Solution

The adjusted present-value model discounts expected free cash flows at rTS's unlevered cost of equity and discounts interest tax shields.

c)

Summary Introduction

To determine: The definition of compressed adjusted present value (CAPV) model.

c)

Expert Solution

Explanation of Solution

The condensed modified present-value method discounts expected free cash flows at the unlevered equity cost and also discounted interest tax shields at the unlevered equity cost to determine the value of transactions. It is called the compact APV because there is a discount on the FCF and tax shields at the same price.

d)

Summary Introduction

To determine: The definition of free cash flow to equity model.

d)

Expert Solution

Explanation of Solution

This then reduces the FCFEs to hit the price of capital in operations at the leveraged cost of equity. You apply non-operating capital to the value and you get the equity value. You then apply the price of the loan to the value of the transactions. First, the free cash flow for the equity model, or the residual dividend model, measures FCFE, the free cash flow owned by shareholders. FCFE is less interest in cost-free cash flow plus interest tax shield.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!

Answer 5

Chapter 17, Problem 1Q

a)

Summary Introduction

To determine: The definition of interest tax shield and value of tax shield.

a)

Expert Solution

Explanation of Solution

The interest tax shield is the amount of cash flow shielded from taxes due to interest tax deductibility. It's the same as rd(D)(T). The tax shield's benefit is the present value of future tax income from interest payment deductibility. The tax shield's value depends on the rate (rTS) used to offset future annual tax shields. In the tax model of the MM, rTS=rd

Because MM assume zero growth, the value of the tax shield is T(D). If growth is constant, then the value of the tax shield is rdTD(1+gL)(rTS−gL). Where rd is the interest rate on the debt and rTS is the discount rate for the tax shield.

b)

Summary Introduction

To determine: The definition of adjusted present value (APV) model.

b)

Expert Solution

Explanation of Solution

The adjusted present-value model discounts expected free cash flows at rTS's unlevered cost of equity and discounts interest tax shields.

c)

Summary Introduction

To determine: The definition of compressed adjusted present value (CAPV) model.

c)

Expert Solution

Explanation of Solution

The condensed modified present-value method discounts expected free cash flows at the unlevered equity cost and also discounted interest tax shields at the unlevered equity cost to determine the value of transactions. It is called the compact APV because there is a discount on the FCF and tax shields at the same price.

d)

Summary Introduction

To determine: The definition of free cash flow to equity model.

d)

Expert Solution

Explanation of Solution

This then reduces the FCFEs to hit the price of capital in operations at the leveraged cost of equity. You apply non-operating capital to the value and you get the equity value. You then apply the price of the loan to the value of the transactions. First, the free cash flow for the equity model, or the residual dividend model, measures FCFE, the free cash flow owned by shareholders. FCFE is less interest in cost-free cash flow plus interest tax shield.

Answer 6

Chapter 17, Problem 1Q

a)

Summary Introduction

To determine: The definition of interest tax shield and value of tax shield.

a)

Expert Solution

Explanation of Solution

The interest tax shield is the amount of cash flow shielded from taxes due to interest tax deductibility. It's the same as rd(D)(T). The tax shield's benefit is the present value of future tax income from interest payment deductibility. The tax shield's value depends on the rate (rTS) used to offset future annual tax shields. In the tax model of the MM, rTS=rd

Because MM assume zero growth, the value of the tax shield is T(D). If growth is constant, then the value of the tax shield is rdTD(1+gL)(rTS−gL). Where rd is the interest rate on the debt and rTS is the discount rate for the tax shield.

Answer 7

Chapter 17, Problem 1Q

a)

Summary Introduction

To determine: The definition of interest tax shield and value of tax shield.

Answer 8

a)

Expert Solution

Explanation of Solution

The interest tax shield is the amount of cash flow shielded from taxes due to interest tax deductibility. It's the same as rd(D)(T). The tax shield's benefit is the present value of future tax income from interest payment deductibility. The tax shield's value depends on the rate (rTS) used to offset future annual tax shields. In the tax model of the MM, rTS=rd

Because MM assume zero growth, the value of the tax shield is T(D). If growth is constant, then the value of the tax shield is rdTD(1+gL)(rTS−gL). Where rd is the interest rate on the debt and rTS is the discount rate for the tax shield.

Answer 9

a)

Expert Solution

Answer 10

a)

Expert Solution

Answer 11

Expert Solution

Answer 12

b)

Summary Introduction

To determine: The definition of adjusted present value (APV) model.

b)

Expert Solution

Explanation of Solution

The adjusted present-value model discounts expected free cash flows at rTS's unlevered cost of equity and discounts interest tax shields.

Answer 13

b)

Summary Introduction

To determine: The definition of adjusted present value (APV) model.

Answer 14

b)

Expert Solution

Explanation of Solution

The adjusted present-value model discounts expected free cash flows at rTS's unlevered cost of equity and discounts interest tax shields.

Answer 15

b)

Expert Solution

Answer 16

b)

Expert Solution

Answer 17

Expert Solution

Answer 18

c)

Summary Introduction

To determine: The definition of compressed adjusted present value (CAPV) model.

c)

Expert Solution

Explanation of Solution

The condensed modified present-value method discounts expected free cash flows at the unlevered equity cost and also discounted interest tax shields at the unlevered equity cost to determine the value of transactions. It is called the compact APV because there is a discount on the FCF and tax shields at the same price.

Answer 19

c)

Summary Introduction

To determine: The definition of compressed adjusted present value (CAPV) model.

Answer 20

c)

Expert Solution

Explanation of Solution

The condensed modified present-value method discounts expected free cash flows at the unlevered equity cost and also discounted interest tax shields at the unlevered equity cost to determine the value of transactions. It is called the compact APV because there is a discount on the FCF and tax shields at the same price.

Answer 21

c)

Expert Solution

Answer 22

c)

Expert Solution

Answer 23

Expert Solution

Answer 24

d)

Summary Introduction

To determine: The definition of free cash flow to equity model.

d)

Expert Solution

Explanation of Solution

This then reduces the FCFEs to hit the price of capital in operations at the leveraged cost of equity. You apply non-operating capital to the value and you get the equity value. You then apply the price of the loan to the value of the transactions. First, the free cash flow for the equity model, or the residual dividend model, measures FCFE, the free cash flow owned by shareholders. FCFE is less interest in cost-free cash flow plus interest tax shield.

Answer 25

d)

Summary Introduction

To determine: The definition of free cash flow to equity model.

Answer 26

d)

Expert Solution

Explanation of Solution

This then reduces the FCFEs to hit the price of capital in operations at the leveraged cost of equity. You apply non-operating capital to the value and you get the equity value. You then apply the price of the loan to the value of the transactions. First, the free cash flow for the equity model, or the residual dividend model, measures FCFE, the free cash flow owned by shareholders. FCFE is less interest in cost-free cash flow plus interest tax shield.