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Opportunity cost of capital for the company

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Alpha Company is financed with both debt and equity. The company has £0.9 million of debt. The annual cost of debt is 3.5%. Suppose the company plans to keep this debt level constant for the next 15 years, and then to repay the principal of £0.9 million at the end of year 15. The tax rate is 24% throughout this period. The opportunity cost of capital for the company is 5.5%. Which of the following statements is correct?

a) The level of debt the company is taking on is optimum.

b) The interest tax shield increases the value of the company by 24%.

c) The present value of the interest tax shield is higher than £70,000.

d) None of the above is correct.

Reference no: EM133111801

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