Assume that a firm's value of equity is $50 million, and it has $40 million of permanent debt. The firm pays 5% interest on its debt and its corporate tax rate is 25 % . What is the firm's present of value of the interest tax shields? Question 1 options: $9 million $10 million $15.75 million $18 million None of the above

Assume that a firm's value of equity is $50 million, and it has $40 million of permanent debt. The firm pays 5% interest on its debt and its corporate tax rate is 25 % . What is the firm's present of value of the interest tax shields? Question 1 options: $9 million $10 million $15.75 million $18 million None of the above

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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for question 9 Ch. 13. For questions 7, 8, and 9, use the following information: 7.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. What is the aftertax cost of debt? Format as a percentage and round to two places past the decimal point as "X.XX" 5.53 8.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of…
Question 2: National bank is an all-equity firm with an after-tax operating income of $350 million per annum; it has 200 million outstanding shares. The firm needs $180 million to meet its annual reinvestment target. The firm expects after-tax operating income to grow at the rate of 5% per annum indefinitely and the cost of capital to remain at its current rate of 12% in the foreseeable future. Required: Estimate the market value of the firm and total value per share accruing to existing shareholder, assuming that the company pays all of its free cash flows as dividend.
"Question 3" Banana Airways. has an expected EBIT of $1,515,000 in perpetuity and tax rate of 25%. The Banana's Air management is paying 6.25% interest for $6,666,000 outstanding bond. Assuming unlevered cost of capital (Ru) is 9.19%. a. Evaluate the firm using Modigliani and Miller approach (Case (II), Proposition (1) with taxes)? { b. Find the equity value and D/E ratio?
The firm can raise an unlimited amount of debt by selling R1,000 par value, 8% coupon interest rate, 20 year bonds on which annual interest payments will be made. To sell the issue, an average discount of R50 per bond would have to be given. The firm also must pay flotation costs of R50 per bond. Firm is in 40% tax bracket. Determine after tax cost of debt. A. 5.86% B. 5.48% C. 5.46% D. 5.55%
The asset of a firm is financed by $100,000 Common Equity, $100,000 Preferred Stock, and $300,000 Bonds. The Weighted Average Cost of Capital (WACC) is 10%. Given that the asset is likely to generate Net Operating Profit After Tax of $100,000. What would be the firm’s EVA? Question 5 options: 1) $5,000 2) $50,000 3) $20,000 4) None of the above.
A company has $5 million in debt outstanding with a coupon rate of 12%. Currently, the yield to maturity (YTM) on these bonds is 14%. If the firm's tax rate is 40%, what is the company's after-tax cost of debt? О А. 7.2% В. 8.4% С. 8.6% D. 10.8%
Integrative Case Assume that you were recently hired as assistant to Jerry Lehman, financial VP of Coleman Technologies. Your first task is to estimate Coleman’s cost of capital. Lehman has provided you with the following data, which he believes is relevant to your task: Questions: The firm’s marginal tax rate is 40%. The current price of Coleman’s 12 % coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Coleman does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firm’s 10%, $100 par value, quarterly dividend, perpetual preferred stock is $113.10. Coleman would incur flotation costs of $2 per share on a new issue. Coleman’s common stock is currently selling at $50 per share. Its last dividend (D0) was $4.19, and dividends are expected to grow at a constant rate of 5% in the foreseeable future. Coleman’s beta is 1.2, the yield on Treasury…
Q.An all-equity company that has a current value $300,000 is considering borrowing $60,000 and using the borrowed funds to repurchase shares. The company can borrow at 5%. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied except the corporate tax rate is 35%, and investors are subject to an 18% tax rate on equity income and a 25% tax rate on debt income. If the company proceeds with the capital restructuring, what will be the value of the company according to M&M Proposition I with personal and corporate taxes?
An overview of a firm's cost of debt For which capital component must you make a tax adjustment when calculating a firm’s weighted average cost of capital (WACC)? Pick the correct choice. A- Preferred stock B- Equity C- Debt Three Waters Company (TWC) can borrow funds at an interest rate of 12.50% for a period of five years. Its marginal federal-plus-state tax rate is 45%. TWC’s after-tax cost of debt is_________% (rounded to two decimal places). At the present time, Three Waters Company (TWC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,136.50 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. If TWC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? Pick the correct choice. 5.60% 5.04%…
MM Model with Zero Taxes An unlevered firm has a value of $625 million. An otherwise identical but levered firm has $75 million in debt. Under the MM zero-tax model, what is the value of the levered firm? Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to the nearest whole number. LA million
5 1. The JJ. Binks Company is an all equity firm. It expects perpetual earnings before interest and taxes (EBIT) of $120 million per year. Its equity required return is 15%. The firm is subject to a 25% tax rate. a. Calculate the value of the un-levered JJ. Binks? b. The company considers leveraging as a way to increase the firm value. With leveraging it will face bankruptcy possibility at a cost of $60 million in exactly one year (Assume a 15% discount rate). The company plans to issue debt and buy back shares with the proceeds. It considers the following debt issuance: $50m, $75m , $100m, 125m, 150m and 175m. These debt levels will introduce an increasing probability financial distress of 5%, 10%, 20%, 30%, 50% and 70%, respectively. Evaluate the JJ. Binks optimal capital structure.
Question 5: The Holmes company's yearend balance sheet is shown below. Its cost of common equity is 12%, its before tax cost of debt is 12% and its marginal tax rate is 35%. Assume that the firm long term debt sells at par value. The firm total debt, which is the sum of the company short term debt and long term debt, equal $2820. The firm has 600 share of common stock outstanding that sells for $5.00 per share. Calculate Holmes WACC using market value weights. Assets Equities Cash 200 Account receivable 156 Equipment 5964 Total Assets 6320 Short term debts Long term debts Common equity Total Equities 520 2300 3500 6320

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