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The Telescoping Tube Company is planning to raise $2,500,000 in perpetual debt at 11% to finance part of their expansion. They have just received an offer from the Albanic County Board of Commissioners to raise the financing for them at 8% if they build in Albanic County. What is the total added value of debt financing to Telescoping Tube if their tax rate is 34% and Albanic raises it for them?

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Answer: $1,300,000

Explanation:

If Albanic raises the debt for them;

Added Value of Debt financing = Target Debt - (Target debt * ( 1 - tax rate) * Rate financing raised at by Albanic) / Rate raised at by Telescoping

= 2,500,000 - ( 2,500,000 * ( 1 - 34%) * 8%)/ 11%

= 2,500,000 - 1,200,000

= $1,300,000

abiolataiwo2015

The total added value of debt financing to Telescoping Tube if their tax rate is 34% and Albanic raises it for them is $1,300,000.

Using this formula

Total added value of debt financing = Perpetual Debt -[Financing rate(Perpetual debt)( 1 - tax rate)/Perpetual debt rate

Let plug in the formula

Total added value of debt financing= $2,500,000 - [.08($2,500,000)(1 - .34)]/.11

Total added value of debt financing= $2,500,000 - [($200,000(.66)]/.11

Total added value of debt financing= $2,500,000 - $1,200,000

Total added value of debt financing= $1,300,000

Inconclusion the total added value of debt financing to Telescoping Tube if their tax rate is 34% and Albanic raises it for them is $1,300,000.

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