Interest tax shields are discounted at pre-tax cost of debt

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Reference no: EM13895406

Folgers Air Transport (FAT) is currently an unlevered firm. It is considering a capital restructuring to allow $200 in perpetual debt. The company expects to generate perpetual EBIT of $151.52. (Assume that depreciation equals capital expenditures and there are no additions to working capital.)

The corporate tax rate is 34% and the pre-tax cost of debt will be 10%. Unlevered firms in the same industry have a cost of equity capital of 20%.

Compute the value of FAT after the restructuring. Ignore any costs of financial distress and assume that interest tax shields are discounted at the pre-tax cost of debt.

Reference no: EM13895406

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