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Kitto Electronics Data Kitto Electronics expects an EBIT of $200,000 for Year-1. EBIT is expected to grow at 6% thereafter. The tax rate is 25%. In order to support growth, Kitto must reinvest 20% of its EBIT in net operating assets. Kitto has $300,000 in 8% debt outstanding, and a similar company with no debt has a cost of equity of 11%. Refer to data for Kitto Electronics. Using the compressed adjusted present value model, what is the value of Kitto's tax shield

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Assuming the cost of equity of 11%. Using the compressed adjusted present value model, the value of Kitto's tax shield is $120,000.

Value of Kitto's tax shield

Given:

EBIT=$200,000

rsU= 11%

Debt=$300,000

Tax rate(T)=25%

rd= 8%

EBIT retained= 20%

g=6%  

Using this formula

VTS = rdTD/(rsU − g)

Let plug in the formula

VTS = 0.08(0.25)($300,000)/(0.11 − 0.06)

VTS =$6,000/0.05

VTS = $120,000

Inconclusion the value of Kitto's tax shield is $120,000.

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