CF chapter 15

Question 1

Interest tax shield formula

Answer 1

Corporate tax rate * Interest payments

Question 2

Value of a levered firm VL formula

Answer 2

Vu + PV(interest tax shield)

Vu = value of an unlevered firm

PV (interest tax shield) = the sum of all future discounted reductions in taxes that derive from levering up the firm

Question 3

Suppose a firm borrows debt D and keeps the debt
permanently. If the firm’s marginal tax rate is Tc , and if the debt is riskless with a risk-free interest rate rf ,
then the interest tax shield each year is Tc ×rf ×D,
and the tax shield can be valued as a perpetuity

Interest tax shield: formula

Answer 3

Tc * D

Question 4

Interest tax shield with non permanent debt:

Answer 4

Marginal tax rate * 1/r* (1-(1/1+r)^n))

Question 5

Weighted average cost of capital

Answer 5

represents a firm’s average after-tax cost of capital from all sources

Question 6

Waac formula

Answer 6

D/D+E * Rd + E/E+D * Re

Question 7

The Weighted Average Cost of Capital with Taxes (formula)

Answer 7

E/E+D *rE + D/E+D *rD * (1-Tc)

Question 8

Effective Tax Advantage of Debt (Formula) T*

Answer 8

1- (1-Tc) *(1-Te)/ (1-Ti)

Tax on corporation, equity, interest

Question 9

With personal taxes and permanent debt, the value of the firm with leverage becomes: V^L

Answer 9

V^u + T* * D