Suppose the company Powerland borrows the new $2 million debt as perpetual bonds at a 5% cost which is equal to the risk-free rate (rf). If Corporate Income Tax rate is 23% rate and the Personal Tax for Debtholders is 5%, by how much does the interest tax shield increase the value of Powerland?

Suppose the company Powerland borrows the new $2 million debt as perpetual bonds at a 5% cost which is equal to the risk-free rate (rf). If Corporate Income Tax rate is 23% rate and the Personal Tax for Debtholders is 5%, by how much does the interest tax shield increase the value of Powerland?

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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If a 5 yr. AA- General Dynamics note is yielding a 35% tax bracket investor 7.56125% while a comparable maturity note from Philadelphia, Pennsylvania is yielding 4.8735%. If the inflation rate is 2.2765%, which bond would the investor prefer and why? If the marginal tax rate for the investor increases to 38.95%, which bond would the investor prefer? What is the critical tax rate?
ACT Inc. has a $1,000 (face value), 30 year bond issue selling for $719.90 that pays an annual coupon of 10.0 percent. Their marginal tax rate is 40%. a. What would be BAT's current before-tax component cost of debt? a. What would be BAT's current after-tax component cost of debt?
The firm's tax rate is 40%. The firm plans to sell bonds having a par value of $1,000. The coupon rate would be 8%, paid in a single payment each year. The time to maturity would be 30 years. The firm believes that it can sell these bonds for $1,200, and that it will incur flotation costs of $15 per bond. What is the firm's after-tax cost of debt?
Without leverage, Impi Corporation will have net income next year of $7.5 million. If Impi's corporate tax rate is 21% and it pays 9% interest on its debt, how much additional debt can Impi issue this year and still receive the benefit of the interest tax shield next year? (Note: Assume Impi's revenues exceed $24 million, and that interest tax deductions are limited to 30% of EBIT under the TCJA.)
Your firm currently has $76 million in debt outstanding with a 9% interest rate. The terms of the loan require it to repay $19 million of the balance each year. Suppose the marginal corporate tax rate is 22%, 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.)
Laurel, Inc., has debt outstanding with a coupon rate of 5.8%and a yield to maturity of 7.1%.Its tax rate is 38%.What is Laurel's effective (after-tax) cost of debt? NOTE: Assume that the debt has annual coupons. Note: Assume that the firm will always be able to utilize its full interest tax shield.
Laurel, Inc., has debt outstanding with a coupon rate of 5.9% and a yield to maturity of 7.1%. Its tax rate is 35%. What is Laurel's effective (after-tax) cost of debt? NOTE: Assume that the debt has annual coupons. Note: Assume that the firm will always be able to utilize its full interest tax shield. The effective after-tax cost of debt is %. (Round to four decimal places.)
Hello. I need help with the following question please. To calculate the after-tax cost of debt, multiply the before-tax cost of debt by(1 – T) . Omni Consumer Products Company (OCP) can borrow funds at an interest rate of 9.70% for a period of four years. Its marginal federal-plus-state tax rate is 45%. OCP’s after-tax cost of debt is 5.34% (rounded to two decimal places). At the present time, Omni Consumer Products Company (OCP) has 5-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,050.76 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 45%. If OCP wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? 3.83% 5.75% 4.79% 4.31%
Suppose your marginal federal income tax rate is 25 percent. 1. What is your after-tax return from holding a one-year corporate bond with a yield of 5.25 percent? (1 pt) 2. What is your after-tax return from a holding a one-year municipal bond with a yield of 4 percent? (1 pt) 3. How would you decide which bond to hold? (Assume that Both bonds carry the same risk.) (1 pt)
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
PDQ, Inc. expects EBIT to be approximately $12.2 million per year for the foreseeable future, and it has 100,000 20-year, 6 percent annual coupon bonds outstanding. (Use Table 11.1.)What would the appropriate tax rate be for use in the calculation of the debt component of PDQ’s WACC? (Round your answer to 2 decimal places.)
Which of the following is TRUE? An American call option on a stock should never be exercised early O An American call option on a stock should not be exercised early when no dividends are expected O It can be optimal to exercise early an American call option on a stock when no dividends are expected and there is no liquidity or portfolio rebalancing need. O An American call option on a stock should be exercised early when no dividends are expected

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