Debt equity ratio and value of the interest tax shield

Reference no: EM1355147

I need help figuring what equations I need to solve for zero debt and conversion to 50% debt. What does "value of firm" mean exactly...ie.market value, share value,

Problem:
Overtime Corporation expects an EBIT of $35,000 every year forever. Overtime Corporation currently has no debt, and its cost of equity is 14 percent. The company can borrow at 8 percent. If the corporate tax rate is 38 percent, what is the value of firm? What will the value be if the company converts to 50 percent debt? To 75 percent debt? To 100 percent debt? What does this tell you about the relationship between the debt-equity ratio and the value of the interest tax shield?

Reference no: EM1355147

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