Maddux Corporation has EBIT of $725,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 11 percent and the corporate tax rate is 24 percent. The company also has a perpetual bond issue outstanding with a market value of $1.6 million. What is the value of the company?

Maddux Corporation has EBIT of $725,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 11 percent and the corporate tax rate is 24 percent. The company also has a perpetual bond issue outstanding with a market value of $1.6 million. What is the value of the company?

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?
A company just issued $453000 of perpetual 5% debt and used the proceeds to repurchase stock. The company expects to generate 107000 of EBIT in perpetuity. The company distributes all its earnings as dividends at the end of each year. The firm's unlevered cost of capital is 14% and the tax rate is 25%. Use APV method to calculate the value of the company with leverage. Your Answer: Answer
Lugget Corp. has one bond issue outstanding with an annual coupon of 4%, a face value of $1,000 and a price of $1,179.65, which matures in 10 years. The company's tax rate is 25%. What is the company's after-tax cost of debt?
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
Edwards Construction currently has debt outstanding with a market value of $75,000. The company has a WACC of 9 percent and has EBIT of $8,750 in the next year. The tax rate is 20%. What is the debt-to-value ratio if the EBIT’s growth rate is 5%? a. 42.86% b. 39.33% c. 96.42% d. 32.45%
Jones Cricket Institute issued a 30-year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%. a. What is the pre-taxed cost of debt? b. What is the after-tax cost of debt? c. Which is more relevant, the pre-tax or the after- tax cost of debt? Why? In the question above, suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years to mature. The book value of this issue is $35 million and the bond sell for 57 percent of par. a. What is the company’s total book value of debt? b. The total market value? c. What is your best estimate of the after-tax cost of debt now?
ABC is an unlevered firm with EBIT of $12,257 per year forever. Its unlevered cost of equity is 11%. It plans to borrow $36,348 perpetual debt at 6% to buy back shares. If the corporate tax is 26%, what is the firm value after the recapitalization?
Hunter Corporation expects an EBIT of $30,000 every year forever. The company currently has no debt and its cost of equity is 14 percent. The tax rate is 20 percent. The company is able to borrow at 8 percent. What will the value of the company be if it takes on debt equal to 60 percent of its levered value? [Note: the proceeds from issuing new debt are used to repurchase Hunter's equity.] O $251,488.1 $194,805.2 O $274,285.8 O $171,428.6
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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