Give true calculation for this accounting question and correct answer give 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: Calculate the Unlevered Value of the Firm (VU)• Step 2: Calculate the Tax Shield• Step 3:…

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 3P

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Similar questions

KT Enterprises is considering undertaking a new project. Based upon the analysis of firms with similar projects, KT has determined that an unlevered cost of equity of 12% is suitable for their project. KT's marginal tax rate is 35%, its borrowing rate is 7%, and KT does not believe that its borrowing rate will change if the new project is accepted. If KT expects to maintain a debt to equity ratio for this project of .6 then KT's equity cost of capital, rE, for this project is closest to: A. 5.0% B.12% C.15.0% D. 17.0%
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).
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
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?
Marcus Inc., a manufacturing firm with no debt outstanding and a market value of $100 million is considering borrowing $ 40 million and buying back stock. Assuming that the interest rate on the debt is 9% and that the firm faces a tax rate of 21%, answer the following question: Estimate the present value of all future interest tax savings, assuming that the debt change is permanent. Group of answer choices a. 21m b. 8.4m c. 0.756m d. 1.89m
A firm is considering a project that will generate perpetual after-tax cash flows of $16,500 per year beginning next year. The project has the same risk as the firm's overall operations and must be financed externally. Equity flotation costs 14 percent and debt issues cost 3 percent on an after-tax basis. The firm's D/E ratio is 0.5. What is the most the firm can pay for the project and still earn its required return? Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar. Maximum the firm can pay
An unlevered firm has a value of $900 million. An otherwise identical but levered firm has $180 million in debt at a 4% interest rate, which is its pre-tax cost of debt. Its unlevered cost of equity is 12%. No growth is expected. Assuming the federal-plus-state corporate tax rate is 25%, use the MM model with corporate taxes to determine the value of the levered firm. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to the nearest whole number. S million
Kohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity. Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is the value of Kohwe if it finances the investment with equity? a. What is the NPV of Kohwe's investment? The NPV of Kohwe's investment is $ million. (Round to two decimal places.) b. What is the value of Kohwe if it finances the investment with equity? The Kohwe finances stment with equity $ million. (Round decimal places.)
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.)
Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 40% Personal tax rate on income from stocks: 30%I know the answer is 0.138 dollars, but following your method the answer is 0.23 dollars. Are you sure this is correct?

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