BUSINESS HIGH SCHOOL

Summit Builders has a market​ debt-equity ratio of 0.65 and a corporate tax rate of 40 %​, and it pays 7 % interest on its debt. The interest tax shield from its debt lowers​ Summit's WACC by what​ amount?

Answers

Answer 1
Answer:

Answer:

1.103%

Explanation:

Data provided in the question:

Market​ debt-equity ratio = 0.65

Corporate tax rate = 40%

Interest on paid its debt = 7%

Now,

Debt ÷ Equity = 0.65

or

Debt = 0.65 × Equity

Weight of Debt = Debt ÷ (Debt + Equity)

or

= ( 0.65 × Equity ) ÷ ( 0.65 × Equity + Equity )

= 0.65 ÷ 1.65

= 0.3939

also,

Tax shield = Corporate tax rate × Interest paid on its debt

= 0.40 × 0.07

= 0.028

= 2.8%

Therefore,

The interest tax shield from its debt lowers​ Summit's WACC by

= Weight of Debt  × Tax shield

= 0.3939 × 2.8%

= 1.103%
Answer 2
Answer:

Final answer:

The interest tax shield from Summit Builders' debt, given a debt-equity ratio of 0.65, the interest rate of 7%, and the tax rate of 40%, lowers its WACC by 1.82%.

Explanation:

The Interest Tax Shield from debt is the reduction in tax expense achieved by offsetting interest expenses on debt against taxable income. The formula for calculating interest tax shield is Interest Paid * Tax Rate.

In the context of this question, the interest paid can be calculated as the product of the debt-equity ratio and the interest rate on the debt. Using the provided information, the calculation would be as follows:

  1. Calculate the interest paid: 0.65 (debt-equity ratio) * 7% (interest rate) = 0.0455 or 4.55%.
  2. Calculate the tax shield: 4.55% * 40% (tax rate) = 1.82%.

So, the interest tax shield from Summit's debt lowers its Weighted Average Cost of Capital (WACC) by 1.82%.

Learn more about Interest Tax Shield here:

brainly.com/question/34543042

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