Corporate Tax Rates Market value of Equity Market value of firm's Debt Total Value of firm Company A 0% Company B 31.25% Company C 40% Unlevered Levered Unlevered Levered Unlevered Levered $200 million ? $200 million ? $200 million ? $0 $0 $0
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Hi there,
I am working on a corporate finance problem. The problem is:
Assume the M&M Model with corporate holds. Assume investors are
taxed at a rate of 15% on equity income and 40% on debt income at personal tax rate. The numbers are on the chart attached.
How do I solve for the levered market value of equity for the three companies? Also, how do I solve for the total value of the firm? Can you please show me how to solve this without using excel?
Thanks
Step by step
Solved in 2 steps
- cost of debt 8% unlevered cost of capital 10% systematic risk of asset 1.5 1) Unlevered Firm Levered Firm EBIT 10000 10000 Interest 0 3200 Taxable Income 10000 6800 34% Tax 3400 2312 Net Income 6600 4488 CFFA 0 -3200 2) PV of the tax shield? Value of levered firm 3200 tax rate 34% (value of levered firm*tax rate)/(1+cost of debt) PV of tax shield 1007.41 value of levered firm/cost of debt 3) Size of debt 40000 4) a) EBIT(1-T)/cost of capital Value of unlevered firm 66000 b) value of unlevered firm+Tax*size of debt Value of levered firm 79600 c) total value of unlevered firm-debt Equity value 39600 d) cost of equity cost of capital+(debt/equity)(cost of capital-cost of debt) cost of equity 12.02% e) wacc formula equity/value of levered firm*cost…cost of debt 8% unlevered cost of capital 10% systematic risk of asset 1.5 1) Unlevered Firm Levered Firm EBIT 10000 10000 Interest 0 3200 Taxable Income 10000 6800 34% Tax 3400 2312 Net Income 6600 4488 CFFA 0 -3200 2) PV of the tax shield? Value of levered firm 3200 tax rate 34% (value of levered firm*tax rate)/(1+cost of debt) PV of tax shield 1007.41 value of levered firm/cost of debt 3) Size of debt 40000 Hi I really need help with question 4 based on the above information Thank you! Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5 1. Fill in the blanks 2. What is the present value of the tax shield? 3. What is the size of debt? 4. Calculate the following values:a) value of unlevered firm; b) value of the levered firm; c) equity value; d) Cost of equity; e) cost…cost of debt 8% unlevered cost of capital 10% systematic risk of asset 1.5 1) Unlevered Firm Levered Firm EBIT 10000 10000 Interest 0 3200 Taxable Income 10000 6800 34% Tax 3400 2312 Net Income 6600 4488 CFFA 0 -3200 2) PV of the tax shield? Value of levered firm 3200 tax rate 34% (value of levered firm*tax rate)/(1+cost of debt) PV of tax shield 1007.41 value of levered firm/cost of debt 3) Size of debt 40000 4) a) EBIT(1-T)/cost of capital Value of unlevered firm 66000 b) value of unlevered firm+Tax*size of debt Value of levered firm 79600 c) total value of unlevered firm-debt Equity value 39600 Hi I need help with subparts d,e, and f! The first three are answered above! Thank you! 4.)Calculate the following values:a) value of unlevered firm; b) value of the levered firm; c) equity…
- Table1: Information of the firms Unlevered firm Levered firm EBIT :10000 :10000 Interest :0 :3200 Taxable income : ? : ? Tax (tax rate: 34%) : ? : ? Net income : ? : ? CFFA : ? : ? Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5 a)Fill in the blanks b) What is the present value of the tax shield? c) What is the size of debt?Company Total assets Interest-bearing debt Average pre-tax borrowing cost Common equity: Book value Market value Income tax rate Market equity beta Risk free rate Market risk premium A 14000 2500 6.00% 3000 2500 35.00% 2.25 2.50% 4.50% B 110000 33000 4.00% 13000 110000 35.00% 0.75 2.50% 4.50% C 44000 18000 5.00% 14000 22000 35.00% 1.2 2.50% 4.50% [WD x RD * (1 - tax rate)] + [wPx RP] + [WE * RE] = 1 Compute the weighted average cost of capital (WACC) for Company A assuming a cost of equity capital of 12.63%. COST OF EQUITY 12.625 2 Compute the weighted average cost of capital (WACC) for Company B assuming a cost of equity capital of 5.88%. COST OF EQUITY 5.875 3 Compute the weighted average cost of capital (WACC) for Company C assuming a cost of equity capital of 7.90%. COST OF EQUITY 7.94
- 133.please dont provide answer in image format thank youThe tax rates for a particular year are shown below: Taxable Income $0 - 50,000 50,00175,000 75,001 100,000 100,001 335,000 What is the average tax rate for a firm with taxable income of $155,456? 25.92% 20.88% 28.41% 39.00% Tax Rate 15% 25% 34% 39% 28.23%
- M... Levered Beta Market Value of Equity Market Value of Debt: Cash Marginal Tax Rate Firm A 1.50 $2.4 million $600 million $50 million 37% Firm B 1.25 $1.0 billion $200 million $75 million 37% 2b. Compute the unlettered beta corrected for cash for each firm (show work). 2c. Using the unlettered beta for corrected for cash, calculate the unlevered beta of Firm A after the acquisition (show work) 2d. Firm A borrowed $1.0 billion and assumed Firm B's debt. Compute the levered beta of Firm A after the acquisition.Q40 If the company’s Earnings before interest and taxes (EBIT) is OMR 500,000, the weighted average cost of capital is 12.5%, and the market value of the equity is OMR 1,000,000; then what is the value of Debt under Net Operating Income Approach? a. OMR 4,000,000 b. OMR 6,000,000 c. OMR 3,000,000 d. OMR 5,000,000Assume you are given the following information for firms A and B: A B D $1,563,400.00 $2,357,316.00 E $2,051,347.00 $1,257,431.00 Price $31.25 $31.25 i 13.52% 13.52% EBIT $97,347.00 $97,347.00 No taxes How do you replicate an investment in 79% of stock B by using stock A? What is the return of the replicating strategy?
