Financial Accounting Tool Manufacturing has an expected EBIT of$35,000 in perpetuity and a tax rate of 35 percent.The firm has $70,000 in outstanding debt at aninterest rate of 9 percent, and its unlevered cost ofcapital is 14 percent. What is the value of the firmaccording to M&M Proposition I with taxes? ShouldTool change its debt-equity ratio if the goal is tomaximize the value of the firm?

Step 1: Define Debt-Equity RatioDebt-Equity Ratio is a type of financial ratio that depicts the…

Answered: Tool Manufacturing has an expected EBIT…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 2P

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Please show your work for the following Suppose that your firm's current unlevered value, V*, is $800,000, and its marginal corporate tax rate is 21 percent. Also, you model the firm's PV of financial distress as a function of its debt level according to the relation: PV of financial distress = 800,000 × (D/V*)2. What is the firm's levered value if it issues $200,000 of perpetual debt to buy back stock? Multiple Choice A) $920,000. B) $869,555. C) $792,000. D) $350,000.
Theresa’s belongs to Harvester, which has expected earnings before interest and tax (EBIT) of £45,000 in perpetuity and a tax rate of 30%. Harvester has £60,000 in outstanding debt at an interest rate of 8%. The unlevered cost of capital is 12%. 1. What is the value of Harvester according to MM Proposition I with taxes? 2. Should Harvester change its debt-equity ratio if the goal is to maximize the value of the firm?
Please solve the below with detailed explanation
Stevensons bakeries and all equity firm that has a projected perpetual EBIT of $144,000 per year. The cost of equity is 10.5% and the tax rate is 21%. Assume there's no depreciation, no capital spending and no change in networking capital. The firm can borrow perpetual debt at 5.8%. Currently, the firm is considering converting to a debt equity ratio of .54. What is the firms levered value? MM assumptions hold.
(Use the following information for the next three questions). Consider a world with taxes but no other market imperfections. BLT machinery has a debt to equity ratio of 2/3. Its cost of equity is 20%, cost of debt is 4%, and tax rate is 35%. Assume that the risk-free rate is 4%, and market risk premium is 8%. Suppose the firm repurchases stock and finances the repurchase with debt, causing its debt to equity ratio to change to 3/2. What is the firm's new cost of equity? None of the choices New cost of equity is 26.05% New cost of equity is 23.59% New cost of equity is 16.32% New cost of equity is 28.00%
Hi-Tech, Inc. has determined that it can minimize its weighted average cost of capital (WACC) by using a debt-equity ratio of 2/3. If the firm's cost of debt is 9% before taxes, the cost of equity is estimated to be 12% before taxes, and the tax rate is 40%, what is the firm's WACC? (The answer choice without supporting calculation will not earn any points).
Milton Industries expects free cash flows of $19 million each year. Milton's corporate tax rate is 22 %, and its unlevered cost of capital is 13%. Milton also has outstanding debt of $73.37 million, and expects to maintain this level of debt permanently. a. What is the value of Miton Industries without leverage? b. What is the value of Milton Industries with leverage? Cam a. What is the value of Milton Industries without leverage? The value of Milton Industries without leverage is 5 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)
In this question, you will calculate the value of a levered firm with corporate taxes. Assume that The Best Diagnostics Lab Inc. is subject to 30% federal-plus-state tax rate and its unlevered value is $25 million. If the firm has $15 million in debt, what is its total market value (VL)? 26.3 Million 29.5 Million 52.3 Million None of the above
The company CapStar Pic has an expected EBIT of E145,000 in perpetuity, and its unlevered cost of capital is 10 percent. The frm has E100.000 in outstanding debt at an interestrate of 10 percent And the corporate tax rate is 21 percent. What is the value of the firm accarding to M&M Proposition i with corporate taxes? O E1.460 million O Mick here if you think that none of the figures shown is the correct solution) O E2921 milion O E1.471 milion O £1.450 mlion
Alpha Inc. has a target debt-to-value ratio of .6. The pretax cost of debt is 10 percent, the tax rate is 21 percent, and the unlevered cost of equity 14 percent. A project the firm is considering has a cash flow to the levered equity holders of $49,661 and an initial unborrowed cost of $220,000. What is the NPV of the project?
Arnell Industries has 5.5 million in permanent debt outstanding. The firm will pay interest only on this debt. Arnell's marginal tax rate is expected to be 40% for the foreseeable future. a. Suppose Arnell pays interest of 9% per year on its debt. What is its annual interest tax shield? b. What is the present value of the interest tax shield, assuming its risk is the same as the loan? c. Suppose instead the interest rate on the debt were 7%. What is the present value of the interest tax shield in this case?
1) Caddie Manufacturing has a target debt-equity ratio of .75. Its cost of equity is 10 percent, and its pretax cost of debt is 6 percent. If the tax rate is 22 percent, what is the company’s WACC? 2) Gnomes R Us is considering a new project. The company has a debt-equity ratio of .76. The company’s cost of equity is 14.8 percent, and the aftertax cost of debt is 8.1 percent. The firm feels that the project is riskier than the company as a whole and that it should use an adjustment factor of +4 percent. What is the company’s WACC? What discount rate should the firm use for the project?

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