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Unformatted text preview: 17. How would the value of the headquarters unit change if the dividends paid on equity became similar to the treatment of interest on debt? Solution: Value of the headquarters unit will increase if the dividends paid on equity become similar to the treatment of interest on debt this is because the biggest advantage of interest payment is that it generates tax shield on interest payment as a result of which the cost of interest is lower effectively on the other hand dividend is an appropriation of profits as a result of which the cost is higher as no tax shield is available. In case treatment becomes similar to that of interest it will also generate tax shield thereby lowering the overall cost and increases the value of headquarter....
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- Fall '11