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

15-year maturity, 8% coupon bond paying coupons monthly is callable in 6 years at a callprice of $1,050. The bond currently sells at a yield to maturity of 11%.a. What is the yield to call?b. What is the yield to call if the call price is $1,100 and the bond can be called in 4 yearsinstead of 6 years?

Suppose you open a savings account with Hillside Bank, where you also have your salaryaccount. The bank will deduct $20 from your salary account every month and put it into thesavings account. The first deposit will take place immediately after you open the account. Ifyou are planning to maintain the account for the next 5 years, how much money will youhave when you close your account 5 years from now? Suppose the interest rate is 7% please show work.

Project Mean Green has an initial after-tax cost of $500,000. The project is expected to produceafter-tax CFs of $100,000 at the end of each year for the next five years and has a WACC of10%.There’s a 20% probability that the project’s growth opportunities will have an NPV of $3million at t=5, and a 80% probability that the NPV will be -1.2 million at t=5.Is it feasible for the company to expand the project after 5 years? plase show work

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.