CCC Limited currently has a debt-to-equity ratio of 1:1. It expects to have a free cash flow to the firm (FCFF) of $5 million next year. The current dividend payout ratio is 80%, and the return on equity is 10%. The cost of equity is 12%, and the cost of debt is 5%. The corporate tax rate is 28%. If the company maintains its current capital structure (i.e. debt-to-equity ratio of 1:1), the present value of the company’s interest tax shield is:Select one alternativeBetween $8 million and $8.5 million.Between $9.5 million and $10 million.Between $10 million and $10.5 million.Between $9 million and $9.5 million.Between $8.5 million and $9 million.
Question
CCC Limited currently has a debt-to-equity ratio of 1:1. It expects to have a free cash flow to the firm (FCFF) of 8 million and 9.5 million and 10 million and 9 million and 8.5 million and $9 million.
Solution
To calculate the present value of the company's interest tax shield, we first need to determine the value of the company's debt. Given that the company has a debt-to-equity ratio of 1:1, this means that the value of the company's debt is equal to the value of its equity.
Next, we need to calculate the company's interest expense. This can be done by multiplying the cost of debt (5%) by the value of the company's debt.
The interest tax shield is then calculated by multiplying the company's interest expense by the corporate tax rate (28%).
Finally, to find the present value of the interest tax shield, we divide the interest tax shield by the cost of debt (5%).
Without the actual value of the company's debt or equity, we cannot provide a numerical answer. However, the steps provided will allow you to calculate the present value of the company's interest tax shield once you have the necessary information.
Similar Questions
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