What is present value of carlton cars interest tax shield

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Question: Carlton Cars, an Ottawa car dealer, is an all-equity firm. Currently it has 5 million shares outstanding and the price per share is $10. Carlton Cars' EBIT is $10 million per year, and it is expected to remain at this level forever. The company pays all of its earnings as dividends. Carlton Cars is considering issuing $20 million worth of debt which it will use to buy back some of its shares; the pre-tax cost of debt is 3%. Carlton Cars assets' beta is equal to 1.2. a) Assuming (unrealistically) that Carlton Cars operates in a country where there are no taxes:

1 . What is the present value of Carlton Cars' interest tax shield under the proposed capital structure?

ii. What is the Carlton Cars' current cost of equity?

iii. What will be Carlton Cars' equity beta after restructuring?

Reference no: EM133369154

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