# M&M-interest tax shield

Within the M&M framework of corporate taxes but no personal taxes, determine the present value of the interest tax shield of Herculio Mining, as well as the total value of the firm. Herculio has net operating income of \$5 million; there is \$50 million of debt outstanding with a required rate of return of 6 percent; the required rate of return on the industry is 12 percent; and the corporate tax rate is 40 percent.

1. Using the data above, compute the value of Herculio Mining, assuming that the present value of bankruptcy costs are \$10 million.

2. Note the home page for Dogs of the Dow (http://www.dogsofthedow.com), look at the year-to-date figures, and observe the dividend yields of the 30 stocks of the Dow Jones Industrial Average. Which industries contain the higher-dividend-yielding stocks, and which contain the lower-yielding stocks? Are there differences in the growth prospects between the high- and low-yielding stocks? Is this what you expected? Explain. (The info. For this question is below…)

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