Ignacio, Inc., had after-tax operating income last year of $1,196,500. Three sources of financing were used by the company: $2 million of mortgage bondspaying 4 percent interest, $4 million of unsecured bonds paying 6 percent interest, and $9 million in common stock, which was considered to be relativelyrisky (with a risk premium of 8 percent). The rate on long-term treasuries is 4 percent. Ignacio, Inc., pays amarginal tax rate of 30 percent.Required:1. Calculate the after-tax cost of each method of financing. Enter your answers as decimal values rounded to three places. For example, 4.36%would be entered as ".044".Mortgage bondsUnsecured bondsCommon stock2. Calculate the weighted average cost of capital for Ignacio, Inc. Round intermediate calculations to four decimal places. Round your final answerto four decimal places before converting to a percentage. For example, .06349 would be rounded to .0635 and entered as "6.35" percent.%Calculate the total dollar amount of capital employed for Ignacio, Inc.3. Calculate economic value added (EVA) for Ignacio, Inc., for last year. If the EVA is negative, enter your answer as a negative amount.Is the company creating or destroying wealth?4. What if Ignacio, Inc., had common stock which was less risky than other stocks and commanded a risk premium of 5 percent? How would that affect theweighted average cost of capital?What is the new EVA? In your calculations, round weighted average percentage cost of capital to four decimal places. If the EVA is negative,enter your answer as a negative amount.

Economic value added refers to the profit at its minimum level after covering all the expenses of…

Ignacio, Inc., had after-tax operating income last year of $1,196,500. Three sources of financ by paying 4 percent interest, $4 million of unsecured bonds paying 6 percent interest, and $9 million in common stock, which was considered to be risky (with a risk premium of 8 percent). The rate on long-term treasuries is 4 percent. Ignacio, Inc., pays amarginal tax rate of 30 percent. Required: 1. Calculate the after-tax cost of each method of financing. Enter your answers as decimal values rounded to three places. For example would be entered as ".044". Mortgage bonds Unsecured bonds Common stock 2. Calculate the weighted average cost of capital for Ignacio, Inc. Round intermediate calculations to four decimal places. Round your f to four decimal places before converting to a percentage. For example, .06349 would be rounded to .0635 and entered as "6.35" %

Ignacio, Inc., had after-tax operating income last year of $1,196,500. Three sources of financ by paying 4 percent interest, $4 million of unsecured bonds paying 6 percent interest, and $9 million in common stock, which was considered to be risky (with a risk premium of 8 percent). The rate on long-term treasuries is 4 percent. Ignacio, Inc., pays amarginal tax rate of 30 percent. Required: 1. Calculate the after-tax cost of each method of financing. Enter your answers as decimal values rounded to three places. For example would be entered as ".044". Mortgage bonds Unsecured bonds Common stock 2. Calculate the weighted average cost of capital for Ignacio, Inc. Round intermediate calculations to four decimal places. Round your f to four decimal places before converting to a percentage. For example, .06349 would be rounded to .0635 and entered as "6.35" %

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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PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $20 million, $28 million, or $36 million. Its corporate tax rate is 38%, and investors pay a 30% tax rate on income from equity and a 35% tax rate on interest income. a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year? b. What is the effective tax advantage of debt for interest expenses in excess of $36 million? (Ignore carryforwards). c. What is the expected effective tax advantage of debt for interest expenses between $20 million and $28 million? (Ignore carryforwards). d. What level of interest expense provides PMF with the greatest tax benefit?
LEX Corporation has $350 million of debt outstanding at an interest rate of 8 percent. What is the dollar value of the tax shield on that debt, just for this year, if LEX is subject to a 35 percent marginal tax rate? (Enter amount in dollars.) Value of tax shield $enter the dollar value of the tax shield
A corporation earns $8.30 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid per share if the company has a payout ratio of 45%? Answer to two decimals (dollars and cents) A corporation earns $8.30 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid per share if the company has a payout ratio of 45%? Answer to two decimals (dollars and cents) ASAP
Ted Williams made deposits of $500 at the end of each year for eight years. The rate is 8% compounded annually. The value of Ted's annuity at the end of eight years is (use the tables in the handbook): Multiple Choice $4,318.30 None of these $5,318.30 $2,873.30 $2,837.03 acer
2. An overview of a firm's cost of debt To calculate the after-tax cost of debt, multiply the before-tax cost of debt by (1-T). Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 11.10% for a period of six years. Its marginal federal-plus-state tax rate is 25%. WGC's after-tax cost of debt is 8.32% (rounded to two decimal places). At the present time, Western Gas & Electric Company (WGC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,495.56 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WGC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 2.94% 2.35% 2.65% 3.38%
Brewster Company manufactures eldeberry wine. Last year, Brewster earned operating income of $195,000 after income taxes. Capital employed equaled $2.4 million. Brewster is 45% equity and 55% 10-year bonds paying 7% interest. Brewster's marginal tax rate is 40%. The company is considered a fairly risky investment and probably commands a 13-point premium above the 5% rate on long-term treasury bonds. Jonathan Brewster's aunts, Abby and Martha, have just retired, and Brewster is the new CEO of Brewster Company. He would like to improve EVA for the company. Compute EVA under each of the following independent scenarios that Brewster is considering. 1. Sugar will be used to replace another natural ingredient (atomic number 33) in the elderberry wine. This should not affect costs but will begin to affect the market assessment of Brewster Company, bringing the premium above long-term Treasury bills to 11 percent the first year and 8 percent the second year. Calculate revised EVA for both…
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?
Gainer Company has three sources of financing: $3 million of mortgage bonds paying 5 percent interest, $2.5 million of unsecured bonds paying 8 percent interest, and $4.5 millsion of common stock, which is considered to be an average risk (with a 6 percent premium). The company's tax rate is 40 percent and the rate of interest on long-term government bonds is 3 percent. Last year, Gainer Company had after-tax income of $769,000. Amount Percent After-Tax Cost Weighted Cost Mortage bonds $3,000,000 0.3 Unsecured bonds $2,500,000 0.25 Common stock $4,500,000 0.45 Total $10,000,000 Fill in the following table to calculated the weighted avergae percent cost of capital.
Mars Corporation has Revenues of $50 million, Tax Expense of $5 million, total Other Expenses of $15 million, and Net Income of $30 million. What is Mars Corporation's income tax RATE? 25.0% 10.0% 14.3% 16.7%
Cha Cha Corporation has three long term loans (interest bearing debt): a loan of $100,000 at 6% interest, a loan of $100,000 at 8% interest, and a loan of $100,000 at 14% interest. The company has accounts payable of $50,000 (non-interest bearing) and equity of $200,000. It estimates that its cost of equity is 12%. Its tax rate is 35%. A. What is Cha Cha Corporation’s weighted average after tax cost of interest-bearing debt? B. What is Cha Cha Corporation’s weighted average cost of capital on interest bearing debt and equity?

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