InterLine Ltd is an electricity distribution company. This means it owns and operates a network of powerlines and other associated infrastructure and fixed assets used to deliver power to homes and businesses. You are assisting the company in undertaking a capital structure review. You have the following information: In the year just passed (year 0), Interline's interest expense was $30 million and this is assumed to remain constant forever. Interline has a debt-to-equity (D/E) ratio of 0.8. Interline's asset beta is 0.45 and its debt beta is 0. The corporate tax rate (and Interline's marginal tax rate) is 28%. Assume all cash flows occur at the year end. Use this information to help answer the questions that follow. (a) Interline's equity beta is? (b) If the risk-free rate is 4%, and Interline's debt is assumed to be riskless, then the total present value of Interline's tax shield is $ 0 million.
InterLine Ltd is an electricity distribution company. This means it owns and operates a network of powerlines and other associated infrastructure and fixed assets used to deliver power to homes and businesses. You are assisting the company in undertaking a capital structure review. You have the following information:
In the year just passed (year 0), Interline's interest expense was $30 million and this is assumed to remain constant forever.
Interline has a debt-to-equity (D/E) ratio of 0.8.
Interline's asset beta is 0.45 and its debt beta is 0.
The corporate tax rate (and Interline's marginal tax rate) is 28%.
Assume all cash flows occur at the year end.
Use this information to help answer the questions that follow.
(a) Interline's equity beta is?
(b) If the risk-free rate is 4%, and Interline's debt is assumed to be riskless, then the total present value of Interline's tax shield is $ 0 million.
Step by step
Solved in 4 steps with 4 images
