Net WC Long-term assets Sum Debt 80 Equity $100 Sum $20 $40 60 Net WC Long-term assets 140 $160 $100 Sum $20 Debt Equity Sum $40 120 $160 Assume that MM's theory holds with taxes. There is no growth, and the $40 expected to be permanent. Assume a 40% corporate tax rate. How much of the firm's value in dollar terms is accounted for by the debt-ge hield?
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
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Net WC
Long-term assets
Sum
Book value
Debt
80 Equity
$100 Sum
Answer: [
a. $60
$20
b. $16
Net WC
$100
]
$40
60 Long-term assets 140
Sum
Market value
$20
c. $44
Debt
Equity
$160 Sum
Assume that MM's theory holds with taxes. There is no growth, and the $40 of debt is
expected to be permanent. Assume a 40% corporate tax rate.
How much of the firm's value in dollar terms is accounted for by the debt-generated
tax shield?
d. $0
$40
120
$160](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F72fe3691-d9fb-46e7-bfa7-c95cc0a282ba%2F14a2b251-cc4b-40f3-b3e0-f6dd6ea2e751%2Fqxcl60d_processed.png&w=3840&q=75)
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