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Present value of the interest rate tax shield

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Company A keeps a constant debt-to-equity ratio policy. The company has an expected EBITDA that perpetually grows at a 2% annual rate. All the assets are fully depreciated. At the moment the debt-to-equity ratio is 1/3 and the cost of debt is 3.75%. The unlevered value of the firm is 13,759,800 and the unlevered return on equity is 8.45%. If the tax rate is 29%, what is the present value of the interest rate tax shield?

(Hint: value of levered firm = value of unlevered firm + present value of interest rate tax shield).

Reference no: EM133069283

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