Chapter 21
Dynamic Capital Structures and Corporate Valuation
ANSWERS TO END-OF-CHAPTER QUESTIONS
21-1 a. An interest tax shield is the amount of cash flow that is sheltered from taxation due to
the tax deductibility of interest. It is equal to rd(D)(T).
The value of the tax shield is the present value of the future tax savings from the
c. The compressed adjusted present value model discounts projected free cash flows at
21-2 The value of a growing tax shield is greater than the value of a constant tax shield.
This means that for a given initial level of debt a growing firm will have more value
SOLUTIONS TO END-OF-CHAPTER PROBLEMS
21-1 VL = VU = $500 million.
21-2 VL = VU + TD= $800 + 0.35($60) = $821 million.
21-4 a. bL= bU[1 + (1 − T)(D/S)].
c. $2 Million Debt: VL = VU + TD = $10 + 0.25($2) = $10.5 million.
rsL = rsU + (rsU − rRF)(1 − T)(D/S)
$4 Million Debt: VL = $10 + 0.25($4) = $11.0 million.
d. $6 Million Debt: VL = $8.0 + 0.40($6) = $10.4 million.
The mathematics of MM result in the required return, and, thus, the same financial
21-5 a. VU =
sU
r
)T1(EBIT
=
= $12 million.
b. rsU = 0.10 = 10.0%.
c. SL =
sL
d
r
)T1)(DrEBIT(
=
15.0
6.0)]10($05.02[$
= $6 million.
d. WACCU= rsU = 10.00%.
b.
million $16.0
0.09 – 0.13
million 5x 0.40x 0.07
million $12.5V
L
. So since
c. TS = (Interest expense)(T)
07.013.0
)07.1( 0.4$
d. 0 1 2 3 4
| | | | |
3.2 3.6 4.0
$ 2.83
SOLUTION TO SPREADSHEET PROBLEM
21-8 The detailed solution for the problem is available in the file Ch21 P08 Build a Model
Solution.xlsx on the textbook’s Web site.
rsU = 13% g = 7%