ITS stands for Interest Tax Shield
Given solutions by professor (answers expressed in terms of thousands I believe)
a) Face value = 1240.3463
b) Value of ITS = 60.5738
c) Value of ITS = 158.7176
Step by step thorough solution is appreciated. Thanks
Problem 4.3. Highroller Investment Co. wishes to borrow $500 million at 2% yearly interest. Interest payments are made annually.
The principal will be repaid at the end of 10 years. Investors demand an annual return of 13% on this debt. Highroller's tax rate is 45%
a. Calculate the face value needed to induce investors to lend $500 million.
b. Calculate the value of ITS received by Highroller.
c. Suppose instead that the debt has a face value of $500 million and a yearly coupon rate of 13% Principal will be repaid at the end of 10 years.Calculate the value of ITS received by Highroller in this case.