--%>
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 : Selling or purchasing problem Atlas

    Atlas Realty Company is interested in buying a house and renting it out for $12,000 a year, collecting the rent in advance each year. This will depreciate the house over 25 years; however sell it after 15 years at twice its purchase price. The maintenance expenditures

    		•
  • Q : Price per share for Corporation For XYZ

    For XYZ Corporation debt-to-equity ratio, marginal tax rate, and dividend payout ratio are all of 40%. The cost of debt is 10%. Cambria contains 1 million shares of common stock, and $25 million in long-term bonds. Its dividend is $1 per share. Determine the EBIT and

    		•
  • Q : Is the given affirmation of an

    Is the given affirmation of an accountancy expert true? “There valuation criterion that reflects the value of the shares of a company in the most accurate way is based on the amount of the equity of shareholder of its balance sheet. Stating that the value of sha

    		•
  • Q : What is optimal capital structure What

    What is optimal capital structure?

    		•
  • Q : Define Credit and Collections Credit &

    Credit & Collections: Usually, credit is stated as the procedure of providing a loan, in which one party transfers wealth to the other with the expectation that it will be re-paid in full plus interest. The definition of collections is connected t

    		•
  • Q : Data Case Please assist with the

    Please assist with the attached Data Case assignment

    		•
  • Q : Explain the Monte Carlo evaluation of

    Explain the Monte Carlo evaluation of integrals.

    		•
  • Q : What is the Capital Cash Flow What is

    What is the Capital Cash Flow?

    		•
  • Q : Estimate stock's current price A

    A company currently pays a dividend of $3.75 per share, D0 = 3.75. It is estimated that the company's dividend will grow at a rate of 15% percent per year for the next 2 years, then the dividend will grow at a constant rate of 7% the

    		•
  • Q : Explain useful properties of

    Explain useful properties of low-discrepancy sequence theory or quasi random number theory.

    		•