Milton Industries expects free cash flows of $4 million each year. Milton's corporate tax rate is 30%, and its unlevered cost of capital is 12%. Milton also has outstanding debt of $24.27 million, and expects to maintain this level of debt permanently. a. What is the value of Milton Industries without leverage? b. What is the value of Milton Industries with leverage? a. What is the value of Milton Industries without leverage? The value of Milton Industries without leverage is $ million. (Round to two decimal places.) b. What is the value of Milton Industries with leverage? The value of Milton Industries with leverage is $ million. (Round to two decimal places.)

Milton Industries expects free cash flows of $4 million each year. Milton's corporate tax rate is 30%, and its unlevered cost of capital is 12%. Milton also has outstanding debt of $24.27 million, and expects to maintain this level of debt permanently. a. What is the value of Milton Industries without leverage? b. What is the value of Milton Industries with leverage? a. What is the value of Milton Industries without leverage? The value of Milton Industries without leverage is $ million. (Round to two decimal places.) b. What is the value of Milton Industries with leverage? The value of Milton Industries with leverage is $ million. (Round to two decimal places.)

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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A company has £350 million of long-term debt in issue paying interest at a rate of 4%, and plans to maintain this level of debt going forward. The marginal tax rate faced by the firm is 25%. Assuming that the company is sufficiently profitable, the present value of the tax shield on interest expense is: a. £84.135m b. £3.365m c. £3.5md. £87.5m
2. Business and financial risk The impact of financial leverage on return on equity and earnings per share Consider the following case of Purple Panda Importers: Suppose Purple Panda Importers is considering a project that will require $350,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $60,000. • Common equity outstanding will be 25,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100% equity capital, then Purple Panda Importers's return on equity (ROE) on the project will be addition, Purple Panda's earnings per share (EPS) will be Alternatively, Purple Panda Importers's CFO is also considering financing the project with 50% debt and 50% equity capital. The company's debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 12,500 shar Panda…
Assume zero corporate tax rate. Acorn Industries owns assets that have 80% probability of having market value $50 million in one year and 20% probability of having market value $20 million in one year. The risk free rate is 4% and Acorn's assets have cost of capital 10%. (a) If Acorn is unlevered, what is the value of Acorn's equity? (b) What is the expected return on equity? (c) What is the volatility of the equity return? (d) What is the WACC?
Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 7.6%, a debt cost of capital of 6.1%, a marginal corporate tax rate of 21%, and a debt-equity ratio of 2.8. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. a. What is Goodyear's WACC? The WACC is%. (Round to two decimal places.)
The Neal Company wants to estimate next year's return on equity (ROE) under different financial leverage ratios. Neal's total capital is $18 million, it currently uses only common equity, it has no future plans to use preferred stock in its capital structure, and its federal-plus-state tax rate is 40%. The CFO has estimated next year's EBIT for three possible states of the world: $4.2 million with a 0.2 probability, $2.7 million with a 0.5 probability, and $0.8 million with a 0.3 probability. Calculate Neal's expected ROE, standard deviation, and coefficient of variation for each of the following debt-to-capital ratios. Do not round intermediate calculations. Round your answers to two decimal places at the end of the calculations. Debt/Capital ratio is 0. RÔE = %σ = %CV = Debt/Capital ratio is 10%, interest rate is 9%. RÔE = %σ = %CV = Debt/Capital ratio is 50%, interest rate is 11%. RÔE = %σ = %CV = Debt/Capital ratio is 60%, interest rate is 14%. RÔE = %σ = %CV =
Problem 3. Humble Manufacturing is interested in measuring its overall cost of capital. The firm is in the 40% tax bracket. Current investigation has gathered the following data: Debt. The firm can raise debt by selling $1,000-par-value, 10% coupon interest rate, 10-year bonds on which annual interest payments will be made. To sell the issue, an average discount of $30 per bond must be given. The firm must also pay flotation costs of $20 per bond. Preferred stock. The firm can sell 11% (annual dividend) preferred stock at its $100-per-share par value. The cost of issuing and selling the preferred stock is expected to be $4 per share. Common stock. The firm's common stock is currently selling for $80 per share. The firm expects to pay cash dividends of $6 per share next year. The firm's dividends have been growing at an annual rate of 6%, and this rate is expected to continue in the future. The stock will have to be underpriced by $4 per share, and flotation costs are expected to amount…
What is the change in value for a firm with $1 million in equity, $2 million in permanent debt at a 10% interest rate, and a 35% tax rate if MM I is modified to recognize corporate taxes?
Horford Co. has no debt. Its cost of capital is 10 percent. Suppose the company converts to a debt-equity ratio of 1. The interest rate on the debt is 7.1 percent. Ignore taxes for this problem. a.What is the company’s new cost of equity? b.What is its new WACC?
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Suppose Goodyear Tire and Rubber Company has an equity cost of capital of 8.6%, a debt cost of capital of 7.1%, a marginal corporate tax rate of 24%, and a debt-equity ratio of 2.5. Assume that Goodyear maintains a constant debt-equity ratio. a. What is Goodyear's WACC? b. What is Goodyear's unlevered cost of capital? c. Explain, intuitively, why Goodyear's unlevered cost of capital is less than its equity cost of capital and higher than its WACC. Question content area bottom Part 1 a. What is Goodyear's WACC? The WACC is enter your response here%. (Round to two decimal places.)

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