The value is calculated by adjusting the cash flow taxes, and the interest payment for the tax. For this calculation, use the formula below:
Value without Leverage = Value Unlevered + [Tax Shield/ (1+Cost of Capital)] + [Interest Payments/(1+Cost of Capital)^2]
Unlevered Value = $83,000 / 16% = $518,750
Tax Shield= 9% x $195,000 x 34% = $5,639
Interest payments = 9% of $195,000 =$17.555
The value with leverage is:
$518,750 + ($5,639/(1+0.16))+($17,555/(1+0.16)^2)= 518 750 + 4 844 .44 + 13 444 .40 = 536 038 .84.
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