Consider an infinitely lived pure-equity firm (no debt). Every year the firm has revenue of £7,000 and a total cost of £6,000 (variable plus fixed costs). It faces a corporate tax rate of 40% and invests every year £300 into a new project. The investment is written off linearly over 10 years (yearly depreciation is £30). The market interest rate is 10%. (a) What is the value of the firm (NPV) on the market? b) Now suppose the corporate tax rate were cut to 30%. All other things equal, what would now be the new value of the firm?
Consider an infinitely lived pure-equity firm (no debt). Every year the firm has revenue of £7,000 and a total cost of £6,000 (variable plus fixed costs). It faces a corporate tax rate of 40% and invests every year £300 into a new project. The investment is written off linearly over 10 years (yearly depreciation is £30). The market interest rate is 10%. (a) What is the value of the firm (NPV) on the market? b) Now suppose the corporate tax rate were cut to 30%. All other things equal, what would now be the new value of the firm?
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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Consider an infinitely lived pure-equity firm (no debt). Every year the firm has revenue
of £7,000 and a total cost of £6,000 (variable plus fixed costs). It faces a corporate tax
rate of 40% and invests every year £300 into a new project. The investment is written
off linearly over 10 years (yearly
(a) What is the value of the firm (
b) Now suppose the corporate tax rate were cut to 30%. All other things equal, what
would now be the new value of the firm?
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