--%>
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 : Company Valuation Project Hello, Need a

    Hello, Need a top-notch finance expert to complete a company valuation assignment for me for a class. Will attach details. Please inform me if you have your graduate level resource who is good with company valuations and executive summary writeup of the analysis please. English writing skills ar

    		•
  • Q : Which data is the most suitable for

    Which data is the most suitable for finding betas?

    		•
  • Q : Commercial Banking Assignment Part I

    Part I Guidelines and requirements: The questions in Part I of this assignment are based on the materials covered in Units 1 and 2. Please write a short-ess

    		•
  • Q : Is Capital Cash Flow identical with

    Is Capital Cash Flow identical with Free Cash Flow?

    		•
  • Q : An example of use beta of Kinepolis in

    A financial consultant is valuing the company I set as an objective (an entertainment centre) by discounting the cash flows until the end of the dealership at 7.26% (interest rate on 30-year-bonds = 5.1%; market premium = 5%, and Beta = 0.47%). 0.47 is a beta provided

    		•
  • Q : Assessing market expectations using CAPM

    Assume that the risk-free rate is 1% and the expected market return is 9%. You are considering purchasing Super Soft stock, which currently sells for $100 a share and will pay its next (annual) dividend of $1.00 exactly one year from today. Super Soft is considered to

    		•
  • Q : What is the required rate of return on

    Woidtke Manufacturing's stock currently sells for $29 a share. The stock just paid a dividend of $2.50 a share (i.e., D0 = $2.50), and the dividend is expected to grow forever at a constant rate of 9% a year. What st

    		•
  • Q : What is real gross domestic product

    Real gross domestic product: If GDP of a particular year is estimated or evaluated on the basis of the base year prices it is termed as real gross domestic product.

    		•
  • Q : What repercussions do variations in

    What repercussions do variations in the oil price have on the value of a company?

    		•
  • Q : Which model was great breakthrough for

    Which one model was great breakthrough for side of finance theory?

    		•