I got the answer below for a question, but it isn\'t right. Does someone have a
ID: 2753751 • Letter: I
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I got the answer below for a question, but it isn't right. Does someone have a better solution? Please don't round intermediate solutions
4.
value:
16.66 points
The Maxwell Company is financed entirely with equity. The company is considering a loan of $1.83 million. The loan will be repaid in equal installments over the next two years, and it has an interest rate of 8 percent. The company’s tax rate is 35 percent.
According to MM Proposition I with taxes, what would be the increase in the value of the company after the loan? (Enter your answer in dollars, not millions of dollars, i.e. 1,234,567. Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))
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MM Proposition I with taxes says that the firm with the greater proportion of debt is more valuable because of the interest tax shield.
So as per question, Interest on considering a loan of $1.83 million for 1year = $1.83 million = $146,400
Interest tax shield for the one year = $146400 * 35% = $51240
Total Interest tax shield for the two years = $51240 * 2 = $102,480
The increase in the value of the company after the loan = $102,480
The Maxwell Company is financed entirely with equity. The company is considering a loan of $1.83 million. The loan will be repaid in equal installments over the next two years, and it has an interest rate of 8 percent. The company’s tax rate is 35 percent.
Explanation / Answer
Interest paid = $1,830,000 * 8% * (1+8%)2 / [(1+8%)2 - 1] * 2 - $1,830,000
= $222,415.38
Tax shield = 35% * $222,415.38
= $77,845.38
The increase in the value of the company after the loan = $77,845.38
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