Pack-and-Send, Inc. expects to have free cash flow of $6.5 million next year and this cash flow will grow at a rate of 6% per year thereafter. The firm's equity cost of capital is 9% and its debt cost of capital is 5%. Assume that Pack-and-Send has a corporate tax rate of 30%. If the firm maintains a debt-to-equity ratio of 0.60, the value of the firm's tax shield is closest to: options: $18.47 million $27.95 million $54.28 million $260.00 million None of the above

Pack-and-Send, Inc. expects to have free cash flow of $6.5 million next year and this cash flow will grow at a rate of 6% per year thereafter. The firm's equity cost of capital is 9% and its debt cost of capital is 5%. Assume that Pack-and-Send has a corporate tax rate of 30%. If the firm maintains a debt-to-equity ratio of 0.60, the value of the firm's tax shield is closest to: options: $18.47 million $27.95 million $54.28 million $260.00 million None of the above

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The firm want to add some leverage to their firm as they are running their business at a 0% debt level.The firm has a projected EBIT of $198,000 and can issue debt at 5.8% per annum. They wish to increase their D/E ratio to 1.08 at the end of the year. The firm estimates their cost of equity to be 14.1% and pays 34% in taxes per year. what is the firm value after it adds this leverage to the firm?
Your firm currently has $108 million in debt outstanding with a 10% interest rate. The terms of the loan require it to repay $27 million of the balance each year. Suppose the marginal corporate tax rate is 21%, and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt? The present value of the interest tax shields is $ ☐ million. (Round to two decimal places.)
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $153,000 per year. The cost of equity is 11.1 percent and the tax rate is 34 percent. The firm can borrow perpetual debt at 6.1 percent. Currently, the firm is considering taking on debt equal to 63 percent of its unlevered value. What is the firm's levered value? Multiple Choice $1,007,162 $818,757 $1,104,594 $909,730 $1,189,563
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $189,000 per year. The cost of equity is 13.5 percent and the tax rate is 35 percent. The firm can borrow perpetual debt at 6.1 percent. Currently, the firm is considering converting to a debt-equity ratio of .99. What is the firm's levered value? Multiple Choice $1,068,450 $910,000 $989,225 $1,150,638 $819,000
We've found that the total value of VetaTaco is $2 million. The firm has $600,000 of debt financing. The pre-tax cost of debt is 10%. The cost of equity is 15%. Suppose VetaTaco does not pay taxes, what would be the firm's WACC? O 13.5% O 9.0% O 14.4% O 11.5%
ces NoNuns Companies has a 21 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Probability of state Expected EBIT in state Recession 0.25 $ 5 million EBIT Average 0.55 $ 10 million Boom 0.20 $ 17 million The firm is considering switching to a 20-percent-debt capital structure, and has determined that it would have to pay an 8 percent yield on perpetual debt in either event. What will be the break-even level of EBIT? Note: Round intermediate calculations. Enter your answer in dollars not millions and round your final answer to the nearest whole dollar amount.
criticism. structure? Explain M-M Theory with their 5 The Holland Company expects perpetual earnings before interest and taxes (EBIT) of $4 6 million per year. The firm's after-tax, all-equity discount rate (ro) is 15%. Holland is subject to a corporate tax rate of 35%. The pretax cost of the firm's debt capital is 10% per annum, and the firm has $10 million of debt in its capital structure. i. ii. iii. Question: 7 What is Holland's value? What is Holland's cost of equity (rs)? What is Holland's weighted average cost of capital (Twacc)?
Suppose you are estimating the WACC for Columbus Inc. It has the following data from its balance sheet: total debt = $200 million; total equity=$120 million. It has 20 million shares outstanding, and its stock is trading at $32 per share. Your analysis shows that the company's current borrowing rate is 7%, and that the cost of equity is 13%. If the company marginal tax rate is 30%, what is its WACC?
Jenkins, Inc., has equity with a market value of $22.6 million and debt with a market value of $11.3 million. The cost of debt is 8 percent per year. Treasury bills that mature in one year yield 4 percent per year, and the expected return on the market portfolio over the next year is 10 percent. The beta of the company's equity is 1.11. The firm pays no taxes. a. What is the company's debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What is the company's weighted average cost of capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the cost of capital for an otherwise identical all-equity firm? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Debt-equity ratio b. Weighted average cost of capital C. Cost of capital 0.50 % %
K SIROM Scientific Solutions has $4 million of outstanding equity and $12 million of bank debt. The bank debt costs 5% per year. The estimated equity beta is 1. If the market risk premium is 9% and the risk - free rate is 4%, compute the weighted average cost of capital if the firm's tax rate is 25%. OA. 6.71% OB. 5.8% C. 5.49% D. 6.1%
Milton Industries expects free cash flows of $14 million each year. Milton's corporate tax rate is 21%, and its unlevered cost of capital is 14%. Milton also has outstanding debt of $25.57 million, and it 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.)
A company has a WACC of 10%. It can borrow at 4%. Assume that the company has a target capital structure of 60% equity, 40% debt. The corporate tax rate is 20%. Based on MM Theory with taxes, what is the cost of equity? What is the WACC?