chapter 9 #4 Assume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if 100 percent debt is used? ____________________ 100 percent common stock? ____________________ (assume that the stockholders will accept 0.08)
chapter 9 #4 Assume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if 100 percent debt is used? ____________________ 100 percent common stock? ____________________ (assume that the stockholders will accept 0.08)
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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Question
chapter 9 #4 Assume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if
- 100 percent debt is used? ____________________
- 100 percent common stock? ____________________ (assume that the stockholders will accept 0.08)
Transcribed Image Text:A Week 5 Assignment
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2. (Continuation of problem 1)
a. Assuming 0.5 common stock, 0.4 debt, and 0.1 preferred stock, the after-tax WACC of the firm is
b. A zero-tax investor holding the proportion of securities given in (a) would earn
Go to 9. The Cost of Capital and
Capital Structure
3. Assume that a firm has earned before-tax income. The corporate tax rate is 35 percent.
A constant WACC (no taxes)
a. If the security used to finance the investment is $1,000 of 10 percent debt, the firm holding the debt (supplying the debt capital) will
earn
after tax.
b. If the security used to finance the investment is $1,000 of 10 percent preferred stock, the corporation holding the preferred stock
(supplying the capital) will earn
c. If the security used to finance the investment is $1,000 of common stock and if the entire after-tax amount of income is paid as a
dividend, the corporation holding the common stock will earn
$153.85.
A constant value
after tax with a 0.70 dividend received reduction.
after tax. The firm has earned before tax income of
Levering a firm
4. Assume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if
Таxes
a. 100 percent debt is used?
b. 100 percent common stock?
Implications of the zero corporate
(assume that the stockholders will accept 0.08)
tax model
5. Assume that the return on tax-exempt securities is 0.09 and that t, = 0.3, tg = 0.15, and to = 0.35, where tg is the rate on capital gains, to is the
corporate tax rate, and t, is the personal tax rate on dividends and interest. Equilibrium conditions exist.
The value of a levered firm with
a. The return to investors on taxable bonds raised as new capital can be expected to be
b. The return to investors on common stock (all capital gains) raised as new capital can be expected to be
c. If taxable debt is issued, the company will have to earn
taxes
before tax, and if common stock is issued the firm will have to
earn
before tax.
Valuing a firm: capital structure and
d. If taxable debt is issued, the company will have to earn
before tax, and if common stock is issued the firm will have to
corporate taxes
earn
before tax.
6. The tax rate for the Gas Corporation is 0.35. The following table has been prepared for the president of the firm. The US Internal Revenue
Code applies.
Personal taxes
Conclusions
Before-tax cost
Capital structure
Bonds
0.14
0.4
Problems
Preferred stock
0.2407
0.1
Common stock
0.333
0.5
Bibliography
7:45 PM
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10/24/2020
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