--%>
Assignment Help - homework help

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 : Liquidity Ratios Liquidity Ratios :

    Liquidity Ratios: Such ratios comprise the Current Ratio and the Quick Ratio or the acid test ratio. Liquidity ratios demonstrate the Liquid position of a company in the short term that is the capability of a firm to pay its obligations in short term.

    		•
  • Q : Types of lease contracts What are the

    What are the types of lease contracts which are seen in practice?

    		•
  • Q : How present value of tax shields be

    I have two valuations of the company that we set as an objective. Within one of them, the present value of tax shields (D Kd T) computed using Ku (required return to unlevered equity) and, in one, by using Kd (required return to debt). The second valuation is too high

    		•
  • Q : Explain Corporate Development Corporate

    Corporate Development: Corporate development is a term which references the range of planning options and strategies which can assist to move a company toward its targets. The procedure of this kind of strategic development can be exerted to just abou

    		•
  • Q : Explain the working of breakthrough for

    Explain the working of breakthrough in low-discrepancy sequences used for option valuation.

    		•
  • Q : Problem on maintaining dividend Jackson

    Jackson Company has 6 million shares of common stock selling at $55 each. It also has $120 million in long-term bonds with coupon 7%, selling at 90. The tax rate of Jackson is 33%. Next year its EBIT is expected to be $25 million with a standard deviation of $7 millio

    		•
  • Q : Illustrates financial consultant has

    A financial consultant obtains various valuations of my company when this discounts the Free Cash Flow (FCF) as opposed to when this uses the Equity Cash Flow. Is it correct?

    		•
  • Q : What is the impact of auto portfolio

    What is the impact of auto portfolio into the quotation of the shares?

    		•
  • Q : Calculate valuation realized by

    Is a valuation realized through a prestigious investment bank a scientifically approved result that any investor could utilize as a reference?

    		•
  • Q : What is Net Operating Profit after Tax

    What is Net Operating Profit after Tax (NOPAT)?

    		•