Westside Manufacturing has EBIT of $10 million. There is $60 million of debt outstanding, with a required rate of return of 6.5 percent. The required rate of return on the industry is 10 percent. The corporate tax rate is 30 percent.
Assume there are corporate taxes but no personal taxes.
a. Determine the present value of the interest tax shield of Westside Manufacturing, as well as the total value of the firm.
b. Determine the gain from leverage, if personal taxes of 10 percent on stock income and 35 percent on debt income exist.