Answered: Value of tax shield

Business

Accounting

Value of tax shield

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter2: Financial Statements, Cash Flow,and Taxes

Section: Chapter Questions

Problem 18P: Rhodes Corporations financial statements are shown after part f. Suppose the federal-plus-state tax...

See similar textbooks

Related questions

Q: Water and Power Company (WPC) can borrow funds at an interest rate of 12.50% for a period of eight…

A: After tax cost of debt = Interest rate x (1 - tax rate)

Q: Your firm currently has $96 million in debt outstanding with a 8% interest rate. The terms of the…

A: We have to find the PV of the interest tax shields. We need to plot the interest and then the…

Q: For which capital component must you make a tax adjustment when calculating a firm’s weighted…

A: WACC or weighted average cost of capital is the proportionate cost of all financing resources…

Q: You have $10,000 cash that you want to invest. Normally, you would deposit the money in a savings…

A: Given information: Municipal bond pays interest of 9% annually. Corporate bond pay interest of 12%…

Q: If a firm borrows $50 million for one year at an interest rate of 9 percent, what is the present…

A: In this question first we need to calculate the interest amount. Interest amount=$50 million*9%=$4.5…

Q: Viserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with…

A: Yield to maturity of the bond is the return which investors would get I the bond is held till…

Q: Braxton Enterprises currently has debt outstanding of $35 million and an interest rate of 8%.…

A: Whenever business takes any debt or loan, it needs to make regular interest payments on the same.…

Q: SMC will be issuing bonds with a face value of P100,000 through an underwriter. The underwriter will…

A: Expenses on Issue: Underwriting Commission = P100,000*7% = P7,000 Interest Expense = 8% =…

Q: One of the advantages of borrowing is that interest is deductible for income tax purposes.a. If a…

A: Interest expense: It can be defined as the cost of borrowing or cost incurred on a loan taken by a…

Q: ACT Inc. has a $1,000 (face value), 20 year bond issue selling for $1,229.40 that pays an annual…

A: 1. What would be BAT's current before-tax component cost of debt It can be calculated using rate…

Q: (Cost of debt) Temple-Midland, Inc. is issuing a $1,000 par value bond that pays 7.9 percent annual…

A: Par Value is $1,000 The annual coupon rate is 7.9% Time to maturity is 15 years Price of bond is…

Q: our brother's business obtained a 30-year amortized mortgage loan for $300,0 urposes. What will the…

A: Present value of all the monthly installments is equal to the loan amount.Equated monthly…

Q: Omni Consumer Products Company (OCP) can borrow funds at an interest rate of 9.70% for a period of…

A: Given, The Face value of bond is $1000 Market price of bond is $1050.76 Coupon rate is 10%

Q: To calculate the after-tax cost of debt, multiply the before-tax cost of debt by (1-7). Western Gas…

A: The cost of debt can be referred to as the cost or the minimum required return that the company…

Q: Green Tea House has a tax rate of 25 percent and an interest tax shield valued at $8,046 for the…

A: Tax Rate = 25% Interest = $8046

Question

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

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Context:

VIEW

Answer

VIEW

Explanation:

VIEW

Step by step

Solved in 3 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

Rhodes Corporations financial statements are shown after part f. Suppose the federal-plus-state tax corporate tax is 25%. Answer the following questions. a. What is the net operating profit after taxes (NOPAT) for 2020? b. What are the amounts of net operating working capital for both years? c. What are the amounts of total net operating capital for both years? d. What is the free cash flow for 2020? e. What is the ROIC for 2020? f. How much of the FCF did Rhodes use for each of the following purposes: after-tax interest, net debt repayments, dividends, net stock repurchases, and net purchases of short-term investments? (Hint: Remember that a net use can be negative.) Rhodes Corporation: Income Statements for Year Ending December 31 (Millions of Dollars) Rhodes Corporation: Balance Sheets as of December 31 (Millions of Dollars)
The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal-plus-state tax rate is 40%. Berndt has no debt. a. Set up an income statement. What is Berndts expected net income? Its expected net cash flow? b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? c. Now suppose that Congress changed the tax laws such that, instead of doubling Berndts depreciation, it was reduced by 50%. How would profit and net cash flow be affected? d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?
Shaye, Inc. has $260 million of debt outstanding at an interest rate of 12 percent. What is the present value of the tax shield on that debt if it has no maturity and if Shaye is subject to a 32 percent marginal tax rate? Present value of tax shield $_________
How much debt Is outstanding if the present value of a perpetual tax shield is $350,000, the tax rate is 21% and the interest rate on the debt is 10%? O $300,000 O$1428,571 O$3.000,000 O$1.666.667
PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $20 million, $28 million, or $36 million. Its corporate tax rate is 38%, and investors pay a 30% tax rate on income from equity and a 35% tax rate on interest income. a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year? b. What is the effective tax advantage of debt for interest expenses in excess of $36 million? (Ignore carryforwards). c. What is the expected effective tax advantage of debt for interest expenses between $20 million and $28 million? (Ignore carryforwards). d. What level of interest expense provides PMF with the greatest tax benefit?
PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $20 million, $28 million, or $36 million. Its corporate tax rate is 38%, and investors pay a 30% tax rate on income from equity and a 35% tax rate on interest income. a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year? b. What is the effective tax advantage of debt for interest expenses in excess of $36 million? (Ignore carryforwards). c. What is the expected effective tax advantage of debt for interest expenses between $20 million and $28 million? (Ignore carryforwards). d. What level of interest expense provides PMF with the greatest tax benefit? a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year? %. (Round to one If PMF has interest expenses of $16 million this coming year, the effective tax advantage is decimal place.)
DBF borrows $3.29B by issuing 12-year bonds. ECB's cost of debt is 6.07%, so it will need to pay interest each year for the next 12 years, and then repay the principal $3.29B in year 12. ECB's marginal tax rate will remain 42.99% throughout this period. By how much does the interest tax shield increase the value of DBF? NOTE: Provide your answers in Millions. E.G. for 100M you must enter 100.0000, for 20M you must enter 20.000, etc.
What is the interest tax shield on these financial accounting question?
1. To calculate the after-tax cost of debt, multiply the before-tax cost of debt by ______. 2. Western Gas & Electric Company (WGC) can borrow funds at an interest rate of 12.50% for a period of six years. Its marginal federal-plus-state tax rate is 25%. WGC’s after-tax cost of debt is ________. (rounded to two decimal places). 3. At the present time, Western Gas & Electric Company (WGC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,555.38 per bond, carry a coupon rate of 11%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If WGC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 4.73% 4.11% 4.93% 3.29%
he Wendt Corporation reported $30 million of taxable income. Its federal tax rate was 21% (ignore any possible state corporate taxes). What is the company's federal income tax bill for the year? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ Assume the firm receives an additional $4 million of interest income from some bonds it owns. What is the additional tax on this interest income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer to the nearest dollar. $ Now assume that Wendt does not receive the interest income but does receive an additional $4 million as dividends on some stock it owns. Recall that 50% of dividends received are tax exempt. What is the additional tax on this dividend income? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000. Round your answer…
2. An overview of a firm's cost of debt To calculate the after-tax cost of debt, multiply the before-tax cost of debt by Perpetualcold Refrigeration Company (PRC) can borrow funds at an interest rate of 12.50% for a period of four years. Its marginal federal-plus-state tax rate is 25%. PRC's after-tax cost of debt is (rounded to two decimal places). At the present time, Perpetualcold Refrigeration Company (PRC) has 10-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,495.56 per bond, carry a coupon rate of 10%, and distribute annual coupon payments. The company incurs a federal-plus-state tax rate of 25%. If PRC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 3.38% 3.53% 2.94% 2.35%
1. An overview of a firm's cost of debt To calculate the after-tax cost of debt, multiply the before-tax cost of debt by Three Waters Company (TWC) can borrow funds at an interest rate of 9.70% for a period of six years. Its marginal federal-plus-state tax rate is 25%. TWC's after-tax cost of debt is (rounded to two decimal places). At the present time, Three Waters Company (TWC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a current market price of $1,329.55 per bond, carry a coupon rate of 12%, and distribute annual coupon payments. The company incurs a federal- plus-state tax rate of 25%. If TWC wants to issue new debt, what would be a reasonable estimate for its after-tax cost of debt (rounded to two decimal places)? (Note: Round your YTM rate to two decimal place.) 5.48% 4.87% 7.00% 6.09%