Problem: Given the following information, calculate the market value of E Corporation, D Corporation, and the present value of the tax shield to D Corporation if both companies have a tax rate of 40%.
Assume there are no agency costs or financial distress and that the expected growth of EBIT is zero.
E Corporation:
cost of equity = 12%
debt = 0
pretax cost of debt = 0
EBIT = $500,000
D Corporation:
cost of equity = 18%
debt = $2,500,000
pretax cost of debt = 8%
EBIT = $500,000