Duncan plc is financed by 5 million shares of equity with a market capitalisation of £90 million, and debt with a face value and market value of £48 million. The interest rate on the debt is 7% and debt interest is tax deductible. The firm's most recent earnings before interest and tax is £25 million. The corporate tax rate is 20%. There are no market imperfections apart from corporate tax. a) What are Duncan's current earnings per share, share price, and cost of equity (return on equity)? Suppose the firm decides to change its capital structure by holding a rights issue to raise enough cash to reduce the debt to £24 million. The rights price will be at a 25% off the current share price. b) How many new shares must be issued in the rights issue? What will be the new earnings per share? What is Duncan's share price following the rights issue?

Duncan plc is financed by 5 million shares of equity with a market capitalisation of £90 million, and debt with a face value and market value of £48 million. The interest rate on the debt is 7% and debt interest is tax deductible. The firm's most recent earnings before interest and tax is £25 million. The corporate tax rate is 20%. There are no market imperfections apart from corporate tax. a) What are Duncan's current earnings per share, share price, and cost of equity (return on equity)? Suppose the firm decides to change its capital structure by holding a rights issue to raise enough cash to reduce the debt to £24 million. The rights price will be at a 25% off the current share price. b) How many new shares must be issued in the rights issue? What will be the new earnings per share? What is Duncan's share price following the rights issue?

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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(Corporate income tax) Last year Sanderson, Inc. had sales of $3.2 million. The firm's cost of goods sold came to $2.1 million, its operating expenses excluding Kdepreciation of $100,000 were $402,000, and the firm paid $152,000 in interest on its bank loans. Also, the corporation received $55,000 in dividend income (from a company in which it owned less than 20 percent of its shares) but paid $26,000 in the form of dividerids to its own common stockholders. Use the corporate tax rates shown in the popup window, to calculate the corporation's tax liability. What are the firm's average and marginal tax rates? The firm's tax liability for the year is $ (Round to the nearest dollar.) w an example Data table Taxable Income $0-$50,000 $50,001-$75,000 $75,001-$100,000 $100,001-$335,000 Marginal Tax Rate 15% 25% 34% 39% $335,001-$10,000,000 34% $10,000,001-$15,000,000 35% $15,000,001-$18,333,333 38 % 35% Over $18,333,333 (Click on the icon in order to copy its contents into a spreadsheet.)…
The tax rate applicable to Blue Co. is 20%. The firm pays 5% interest on the P350,000 outstanding loan and the total preferred dividends to be distributed is P16,500. What is the Financial Breakeven point?
NuStuff Inc. has raised $8M by selling bonds at an average rate of 7%. NuStuff’s stockholders expect a 14% rate of return, and there is $15M in common stock and retained earnings. NuStuff has $4M in loans at an average rate of 9%. What is the firm’s cost of capital: (a) Before taxes? (b) After taxes with a combined tax rate of 26%?
The financial breakeven point of Soil Inc. is P90,000, while the tax rate applicable to the company is 30%. The company pays 10% interest on the P200,000 outstanding loan. How much is the total preferred dividends distributed?
Sunshine Travel has earnings of £18 million of which £6 million is available for either investment or shareholders. Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or b)distribute as a dividend. Sunshine Travel faces a corporate tax rate of 25 per cent. As managers of the firm, you know that the shareholder base is diverse. You have pension funds that are tax-exempt, corporate investors with a marginal tax rate of 25 per cent, and retail investors who have a 45 per cent marginal tax rate. Required:b) Sunshine travel has decided to distribute the £6 million to shareholders. Advise Sunshine Travel the choice between paying cash dividends and repurchasing shares.
Vijay
Barclay Corp is operating in a country K where the corporate tax is 40%, personal income tax on bond investment is 25% while the personal tax on stock is 29%. Assume the firm’s earnings before interest and taxes is $5,400,000 and cost of equity with zero debt is 9%. (Please Show Work) If Barclay current has $12 million total market value of debt financing, what would be the market value of the company of Barclay Corp in this country K?(Please Show Work) What is the proportion of debt (wd) and equity (ws) financing for Barclay Corp with financial leverage? (Please Show Work)
Particulate plc is an all-equity-financed business with a market value of £35 million and a cost of capital (after tax) of 20 per cent p.a. The business intends to purchase and cancel £8 million of equity finance using the cash raised from issuing 10 per cent irredeemable loan notes. The rate of corporation tax is 30 per cent. Assuming that the assumptions of Modigliani and Miller (in a world with taxes) are correct, how will the capital restructuring affect: (a) The market value of Particulate plc; (b) Its cost of equity; and (c) Its weighted average cost of capital?
Assume that CVC Corp.'s marginal tax rate is 35%, investors in CVC pay a 15% tax rate on income from equity and a 35% tax rate on interest income. CVC is equally likely to have EBIT this coming year of $20 million, $25 million, or $30 million. What is the effective tax advantage of debt if CVC has interest expenses of $8 million this coming year?
Farmington Company can borrow at 7.05 percent. The company currently has no debt and the cost of equity is 11.45 percent. The current value of the firm is $660,000. The corporate tax rate is 23 percent. What will the value be if the company borrows $375,000 and uses the proceeds to repurchase shares?
Pfd Company has debt with a yield to maturity of 7.4%, a cost of equity of 14.2%, and a cost of preferred stock of 9.4%. The market values of its debt, preferred stock, and equity are $11.5 million, $3.5 million, and $15.1 million, respectively, and its tax rate is 21%. What is this firm's after-tax WACC? Note: Assume that the firm will always be able to utilize its full interest tax shield. Pfd's WACC is __ % ? (Round to two decimal places.)
Tatum can borrow at 6.85 percent. The company currently has no debtand the cost of equity is 11.25 percent. The current value of the firm is $640,000. The corporate tax rate is 24 percent. What will the value be if the company borrows $355,000 and uses the proceeds to repurchase shares?

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