Use the Information for the Question(s) Below

question 24

Essay

Use the information for the question(s) below.
KD Industries has 30 million shares outstanding with a market price of $20 per share and no debt. KD has had consistently stable earnings, and pays a 15% tax rate. Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares.
-The Grant Corporation is considering permanently adding $500 million of debt to its capital structure.Grant's corporate tax rate is 15% and investors pay a tax rate of 29% on their interest income and 20% on their income from capital gains and dividends.Calculate the present value of the interest tax shield provided by this new debt.

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Definitions:

Warranty Expense

The estimated cost of honoring product warranties, which companies recognize to match expenses with related revenues.

Estimated Warranty Costs

Projected expenses that a company expects to incur to repair or replace products during a warranty period.

Estimated Liability

A financial obligation that is expected to occur but has not been finalized in amount or timing.

Warranty Expenses

Costs that a company anticipates for repairing or replacing defective products sold to customers under warranty.