FIN 401 Study Guide - Midterm Guide: Tax Shield, Net Present Value, Share Repurchase

• School: Ryerson University
• Department: Finance
• Course: FIN 401
• Professor: Edward Blinder

Document Summary

Step 1: set nal = 0 and calculate for pv of lease payment. 0 = capital cost pvccats pv of lease payments. Step 2: substitute this into pv and solve for pmt. N = (given) , i% = rd. (after tax), pv = pvlpmt (found above), fv = 0 , p/y = 1, c/y =1 exe (pmt) = xxx. Lp before tax = lp after tax (found in step 2) / (1-tc) = break even. Any pmt below this break even the nal will be positive for customer and negative for company offering lease. Any pmt above this break even the nal will be negative for customer and positive for company offering lease. No tax the value of a levered firm is equal to the value of an unlevered. Capital structure is irrelevant, wacc is the same no matter what. With tax the value of levered firm is equal to the value of unlevered firm plus the tax shield.