(Computing interest tax savings) Presently, H. Swank, Inc. does not use any financial leverage and has total financing equal to $1.1 million. It is considering refinancing and issuing $505,000 of debt that pays 4.6 percent interest and using that money to buy back half the firm's common stock. Assume that the debt has a 25-year maturity such that Swank will have no principal payments for 25 years. Swank currently pays all of its net income to common shareholders in the form of cash dividends and intends to continue to do this in the future. The corporate tax rate on the firm's earnings is 35 percent. Swank's current income statement (before the debt issue) is shown here: E a. If Swank issues the debt and uses it to buy back common stock, how much money can the firm distribute to its stockholders and bondholders next year if the firm's EBIT remains equal to $149,000? b. What are Swank's interest tax savings from the issuance of the debt? c. Are Swank's stockholders better off after the debt issue? a. The amount that Swank can distribute is $ . (Round to the nearest dollar.) b. The firm's interest tax savings are $. (Round to the nearest dollar.) Data Table c. Are Swank's stockholders better off after the debt issue? (Select the best choice below.) O A. The debt issue makes Swank's stockholders "better off" because it increases the firm's return on equity by 8.80%. Earnings before interest and taxes (EBIT) 149,000 O B. The debt issue makes Swank's stockholders "better off" because it increases the firm's return on equity by 13.74%. Less: Interest expense O C. The debt issue makes Swank's stockholders "worse off" because it decreases the firm's return on equity from 13.74% to 8.80%. Equals: Earnings before taxes 149,000 (52,150) Less: Taxes at 35% Click to select your answer(s). 96,850 Equals: Net income
(Computing interest tax savings) Presently, H. Swank, Inc. does not use any financial leverage and has total financing equal to $1.1 million. It is considering refinancing and issuing $505,000 of debt that pays 4.6 percent interest and using that money to buy back half the firm's common stock. Assume that the debt has a 25-year maturity such that Swank will have no principal payments for 25 years. Swank currently pays all of its net income to common shareholders in the form of cash dividends and intends to continue to do this in the future. The corporate tax rate on the firm's earnings is 35 percent. Swank's current income statement (before the debt issue) is shown here: E a. If Swank issues the debt and uses it to buy back common stock, how much money can the firm distribute to its stockholders and bondholders next year if the firm's EBIT remains equal to $149,000? b. What are Swank's interest tax savings from the issuance of the debt? c. Are Swank's stockholders better off after the debt issue? a. The amount that Swank can distribute is $ . (Round to the nearest dollar.) b. The firm's interest tax savings are $. (Round to the nearest dollar.) Data Table c. Are Swank's stockholders better off after the debt issue? (Select the best choice below.) O A. The debt issue makes Swank's stockholders "better off" because it increases the firm's return on equity by 8.80%. Earnings before interest and taxes (EBIT) 149,000 O B. The debt issue makes Swank's stockholders "better off" because it increases the firm's return on equity by 13.74%. Less: Interest expense O C. The debt issue makes Swank's stockholders "worse off" because it decreases the firm's return on equity from 13.74% to 8.80%. Equals: Earnings before taxes 149,000 (52,150) Less: Taxes at 35% Click to select your answer(s). 96,850 Equals: Net income
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
Related questions
Question
Transcribed Image Text:(Computing interest tax savings) Presently, H. Swank, Inc. does not use any financial leverage and has total financing equal to $1.1 million. It is considering refinancing and issuing $505,000 of debt that pays 4.6
percent interest and using that money to buy back half the firm's common stock. Assume that the debt has a 25-year maturity such that Swank will have no principal payments for 25 years. Swank currently pays all of
its net income to common shareholders in the form of cash dividends and intends to continue to do this in the future. The corporate tax rate on the firm's earnings is 35 percent. Swank's current income statement
(before the debt issue) is shown here: E
a. If Swank issues the debt and uses it to buy back common stock, how much money can the firm distribute to its stockholders and bondholders next year if the firm's EBIT remains equal to $149,000?
b. What are Swank's interest tax savings from the issuance of the debt?
c. Are Swank's stockholders better off after the debt issue?
a. The amount that Swank can distribute is $ . (Round to the nearest dollar.)
b. The firm's interest tax savings are $. (Round to the nearest dollar.)
Data Table
c. Are Swank's stockholders better off after the debt issue? (Select the best choice below.)
O A. The debt issue makes Swank's stockholders "better off" because it increases the firm's return on equity by 8.80%.
Earnings before interest and taxes (EBIT)
149,000
O B. The debt issue makes Swank's stockholders "better off" because it increases the firm's return on equity by 13.74%.
Less: Interest expense
O C. The debt issue makes Swank's stockholders "worse off" because it decreases the firm's return on equity from 13.74% to 8.80%.
Equals: Earnings before taxes
149,000
(52,150)
Less: Taxes at 35%
Click to select your answer(s).
96,850
Equals: Net income
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 8 steps with 4 images
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education