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What is the annual interest tax shield generated

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EG Industries currently has 14 million shares outstanding with a market price of $45 per share and no debt. The company pays taxes at a corporate tax rate of 35%. Management plans to borrow $200 million and use the proceeds to repurchase stock, i.e. lower the equity stake in the firm. This change in capital structure will be permanent, i.e. EG Industries will forever hold $200 million of debt on its balance sheet. The company's expected cost of debt is 5%.

a) What is the annual interest tax shield generated by this debt?

b) What is present value of the interest tax shield associated with this debt?

c) What is the value of EG Industries after the change in capital structure?

d) What will be the price per share of EG Industries' stock after the change in capital structure and how many shares will be outstanding after the change?

Reference no: EM133059916

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