Question

Size of Tax Shield.  Roxy Broadcasting was originally an​ all-equity firm with a​ before-tax value of $ 20 comma 000 comma 000. Determine the size of the tax shield with a corporate tax rate of 10​%, 20​%, 30​%, and 40​% if​ Roxy's capital structure is 40 divided by 60 debt to equity. Determine the same if the capital structure is 60 divided by 40.

If​ Roxy's capital structure is 40​/60 debt to​ equity, what is the size of the tax shield with a corporate tax rate of 10​%?

Answer 1

At 40/60 Debt Equity
Debt amount=40%*20000000	8000000
Tax shield at 10% tax rate= 10%*Debt value	800000
Tax shield at 20% tax rate= 20%*Debt value	1600000
Tax shield at 30% tax rate= 30%*Debt value	2400000
At 60/40 Debt Equity
Debt amount=60%*20000000	12000000
Tax shield at 10% tax rate= 10%*Debt value	1200000
Tax shield at 20% tax rate= 20%*Debt value	2400000
Tax shield at 30% tax rate= 30%*Debt value	3600000