Value of interest tax shield

[erlend941]

Hi, im struggling with an assigment and was wondering if anybody out there could help me.
“A company has a WACC equal to 15%, a constant and perpetual expected EBITDA equal to 3,100,000 dollars, an unlevered return on equity of 22,53% and it keeps a constant D/E ratio. If the tax rate is equal to 25% and the assets are fully depreciated, what is the value of the interest rate tax shield?”
WACC=15%
Perpetual and constant EBITDA equal 3,100,000 (the assets are fully depreciated)
Unlevered RoE=22,53%
Constant D/E ratio
Tax rate=25%
Im having a tough time understanding how to calculate the interest tax shield, because the amount of debt is not given, and im not quite sure how to do this.
Thanks in advance

 

[vallabhu]

What is your D/E ratio?

 

[erlend941]

I assume it is 1, considering there’s no given D/E, just says that it is constant.

 

[erlend941]

No one?

 

[darshanP]

Are you sure there are no Missing lelements?…I am trying…pulling my hair off…

 

[erlend941]

As far as I know there are no missing elements, I literally copied the entire text. (triple-checked it). I am pretty sure that all the elements that are required to solve it is there (at least my professor told me so), but I have no clue how to solve it, and my professor is not giving out the solution manual for some reason.

 

[onlysimon]

firm is zero growth, so payout ratio is 100%. the figure 22.53% is a hint..
(0.2253 - 0.15 )/ ( 1-0.25) = 10%

 

[erlend941]

Mind elaborating? Still kind of new to corporate finance, and my professor havent been through this topic yet unfortunately.

 

[MrSmart]

Value of equity = 3,100,000/0.2253 = 13759431
Value of firm = 3100000/.15 = 20600000
Value of debt ~ 6900000
Calculate the D/D+E, then extrapolate the cost of debt from the WACC (the cost of equity is not given, so that’s the only missing input), then multiply the cost of debt by the value of debt, and apply the tax rate.
That’s how I’d do it anyway.