permaban

[permaban]

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You do not pay taxes on interest expenses. The present value of the tax shield is equal to (r*D*T)/r. r=interest rate on debt, D=level of debt in dollars, T=tax rate. Also, you have to assume that this tax shield is a perpetuity. The present value of the tax shield is added to the value of the firm, which equity holders reap benefits from(If you assume no financial distress).

Let me know if this helps, I didn’t want to overwhelm you with details.

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