Compute the value of the debt tax shield proposed

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Reference no: EM131415143

The Jack and Tyler Pizza Co. is financed entirely with equity and has grown very quickly over the past 8 years. The firm has hired the consulting firm of Stephanie & Chiara, LLC, to analyze the firm's financing. The consulting firm recommends that the firm borrow $100 million (face value) in perpetual riskless debt at (the current market interest of) 10 percent and buy back $100 million in equity. The founders, a team of brothers who know pizzas very well, but not finance, explain that taking on debt would reduce the earnings available to equity each year by the amount of the interest, thus reducing the value of the equity's claim, and therefore would not benefit the shareholders, most of whom are family and friends. Analyze the founder's argument and compute the value of the debt tax shield proposed by Stephanie & Chiara assuming T_E = 0.14, T_D = 0.28, and T_C = 0.34.

Reference no: EM131415143

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