Homework Answers
Tax Shield Benefit = Debt * Interest Rate * Tax Rate = $70 million * 0.05 * 0.35 = $1.225 million
PV of Debt Tax Benefit = [Tax Shield Benefit * (1 + g)] / [r - g]
= [$1.225 million * (1 + 0.03)] / [0.05 - 0.03] = $1.26175 / 0.02 = $63.0875 million
Value of levered firm = Value of Unlevered Firm + PV of Debt Tax Benefit
= $900 million + $63.0875 million = $963.09 million
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