--%>

Does value of the company increase when interest is double

According to the valuation method depends on tax shields, the value of the company (Vl) is the value of the unleveraged company (Vu) in addition with the value of tax shields (VTS), thus, the higher the interest and the higher the VTS. Therefore, does the value of the company increase when I call my bank and tell them to charge me twice the interest?

E

Expert

Verified

In fact, the valuation formula is VL = Vu + VTS. There value of the company (VL) is also the value of the shares (E) in addition with the value of the debt (D). Therefore, E + D = Vu + VTS. The result of double interests would be: an increase in VTS that would be superior to D causing a decrease into E.

The value of the company does increase although the value of the debt increases and also the value of the shares decreases (this does not seem to satisfy shareholders unless they own the debt).

   Related Questions in Corporate Finance

  • Q : Problem on car rental plans Ape Car

    Ape Car Rental plans to begin its business by buying 10 cars at the average price of $18,000 each, depreciating them entirely over 5 years utilizing the straight-line method. It will rent space in a parking lot for $300 a month, paying the rent in advance every month.

  • Q : International financial what can we

    what can we expanded opportinity set of international finance?

  • Q : Minimum annual savings problem XYZ

    XYZ Company is interested in purchasing a new corporate jet for $6 million. This will depreciate the jet completely in 5 years and then sell it for $5 million. The jet will utilize $60,000 in fuel annually, and its maintenance will be $40,000 yearly. The tax rate of X

  • Q : Zurich Pvt Ltd. You have joined Zurich

    You have joined Zurich Pvt. Ltd as a Finance manager. You are given the following information: Zurich Pvt Ltd. is a diversified manufacturing firm dealing with electrical appliances. In 2012, the firm reported an operating income of Rs. 857.60 million and faced a tax rate of 35% on income. The firm

  • Q : Why is Split useful Why is Split useful?

    Why is Split useful?

  • Q : Explain the definition of WACC An

    An investment bank computed my WACC. The report is as: “the definition of the WACC is defined as WACC = RF + βu (RM – RF); here RF being the risk-free rate and βu the unleveraged beta and RM the market risk rate.” It is differ from what we

  • Q : What is Net Operating Profit after Tax

    What is Net Operating Profit after Tax (NOPAT)?

  • Q : Profitability Ratios Profitability

    Profitability Ratios: These ratios comprise the Gross profit Margin, Net profit Margin, Operating Margin, Return on Equity (ROE), and Return on Total Assets. Such ratios help the firm to examine its profitability, the trend in profits and aid to take

  • Q : Understand and interpret financial

    Our purpose this week: learning how to understand and interpret financial statements. Assignment: The class should discuss all of the questions listed below as they rel

  • Q : Discretion can distort results Discuss

    Discuss how management’s discretion in applying accounting rules can mislead investors. Provide three examples and how the discretion can distort results?