What is the firms current tax-shelter from interest

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Reference no: EM131012403

(corporate finance tax) A firm, about to be founded by a couple of pension funds, will have a 50% debt and 50%-equity capital structure. The firm expects to invest $1,200. It then expects to have operating income of $120 the following year, of which $40 will be paid out as interest payments and $60 (which is what is left over after having paid $20 in corporate income taxes) as a repurchase (or dividend). The firm then shuts down, returning the original $1,200 investment to its investors. The prevailing firm cost of capital is about 11% (and, for convenience, you can assume that all future cash flows can be discounted by this rate, regardless of whether it is tax-savings, firm-capital, etc.; in fact, when not inappropriate, the firm sometimes rounds its final results to the nearest half-dollar). Its tax rate is 25%. What is the firm’s current tax-shelter from interest?

Reference no: EM131012403

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