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Investment advice and corporate finance
Module 12Investment Management and Corporate FinanceAn all-equity firm is worth RM800 million. It borrows RM300 million permanently and uses it to buy back shares. With corporate tax at 24% and MM's assumptions with taxes, what is the geared firm's value?
MM with corporate taxes: VL = VU + t × D = 800 + 0.24 × 300 = RM872 million, the extra value being the present value of the interest tax shield on permanent debt. RM800 million is the no-tax answer. RM728 million deducts the tax shield. RM1,100 million adds the whole debt, as if borrowing itself created value. Source: SIDC Module 12 Study Outline (Jul-Dec 2026) Section 8 (Topics 1, 3, 4, 8, 16, 17); Brealey, Myers and Allen, Principles of Corporate Finance (as at October 2026).
Adding the debt rather than the tax shield on it.
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