Capital Structutre and Payout Policy

QUESTION

Assume that Microsoft has a total market value of $300 billion and a marginal tax of 35%. If it permanently changes its leverage from no doubt by taking on new debt in the amount of 13% of its current market value, what is the present value of the tax shield it will create**Hint fomr teacher Use Equ
According to M&M proposition, the value of the levered firm is equal to the value of the unlevered firm plus the present value of the interest tax shield. VL = VU TC x D Where VL is the value of the levered firm = VU is the value of the unlevered firm=$300 billion TC is the tax rate = 35% D is the amount of debt = 39 billion (13% on $300 billion) Substituting

hee values in the above formula, we get VL = $300 billion 0.35 x $39 billion = $300 billion $13.65 billion = $313.65 billion Therefore, the present value of interest tax shield is $13.65 billion and the value of levered firm is $313.65 billion.

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