1.

What is the value of the tax shield if the value of the firm is Rs.5 million, its value if unlevered would be Rs.4.78 million, and the present value of bankruptcy and agency costs is Rs.360,000?

Answer»

The value of the tax shield is $580,000

Explanation:

The formula and the computation of the value of the tax shield is shown below:

Value of the FIRM= Value of unlevered + value of the tax shield - (Present value of Bankruptcy + Agency costs)

$5,000,000 = $4,780,000 + value of the tax shield - $360,000

$5,000,000 = $4,420,000 + value of the tax shield

So, the value of the tax shield is

= $5,000,000 - $4,420,000

= $580,000

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