Answered: Vonte Company has a 25 percent tax…

Vonte Company has a 25 percent tax rate. Its total interest payment for the year just ended was $22.3 million. What is the interest tax shield?

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

See similar textbooks

Related questions

Q: The company has a 10% interest bearing, promissory note of 50,000, payable after 5 years. Sales…

A: The financial leverage is the ratio that helps in measuring the dependency of the entity on debt…

Q: Arnell Industries has 5.5 million in permanent debt outstanding. The firm will pay interest only on…

A: Tax shield refers to the amount of money that the company saves on taxes by paying out the interest…

Q: Diamond Company's cost of debt financing is 10%. Its tax rate is 35%. Diamond has $3,000,000 of…

A: The cost of debt is the interest expense to be paid on the debt. Since interest expenses is tax…

Q: The Redwood Company is financed entirely with equity. The company is considering a loan of $20…

A: Amount of Loan is 20 millionCost of Loan is 8%Time Period of Loan is 2 yearsTax Rate is 24%

Q: Your firm currently has $112 million in debt outstanding with a 10% interest rate. The terms of the…

A: Present value factor is computed as follows:-PVF = wherePVF = present value factorr= interest raten=…

Q: Sparkling Water, Incorporated, expects to sell 3.7 million bottles of drinking water each year in…

A: The present value of a sum of money is its estimated future value as of right now. It may also be…

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: To calculate the after-tax cost of debt, multiply the before-tax cost of debt by . Andalusian…

A: Businesses utilise the capital budgeting process to assess possible big projects or investments.…

Q: Shaye, Inc. has $260 million of debt outstanding at an interest rate of 12 percent. What is the…

Q: Pfizer currently has a Net Profit Margin of 5%, its corporate tax rate is 21% and its annual…

A: The Times Interest Earned (TIE) ratio, also known as the interest coverage ratio, is a measure of a…

Q: You purchased 1000 shares of stock in Cumberland Software for $3 per share on January 1, 2006. Over…

A: 1. Initial Investment: 1000 shares at $3 per share = $3,0002. Annual Dividends: 7 cents per share…

Q: Patterson Brothers recently reported an EBITDA of $18.5 million and net income of $5.6 million. It…

A: EBITDA stands for Earnings before interest, taxation, deparation and amortization. Net income =…

Q: Last year, Lee Industries decided to restructure some of its debt by paying off one of its…

A: A theory that helps to compute the present or future value of the cash flows is term as the TVM…

Q: Frosty Corporation pays 11.6% interest on its outstanding bonds. If its tax rate is 40%, what is…

A: When the corporation pays the interest on bonds, they are eligible to deduct this as an expense in…

Q: tax liability

A: Income tax is compulsory and pinches any entity’s picket. However, it allows a myriad of deductions…

Q: Braxton Enterprises currently has debt outstanding of $25 million and an interest rate of 9%.…

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

Q: SETAL has an unlevered cost of equity equal to 12% and a tax rate of 31%. In years one, two, and…

A: Horizon Value of the Interest Tax ShieldThe horizon value of the interest tax shield refers to the…

Q: Your company is borrowing $5,800,000 in the form of notes payable from a bank. The bank is…

A: Net Yield = Interest rate * ( 1 - Tax Rate ) Interest rate is the rate charged by bank.

Q: Amar Corporation pays 11.6% interest on its outstanding bonds. If its tax rate is 40%, what is its…

A: Solution:- When a company issue bonds to raise funds, it pays interest on it. This interest is…

Q: The Redwood Company is financed entirely with equity. The company is considering a loan of $20…

A: To calculate the increase in firm value attributed to the interest tax shield of the loan, we can…

Q: if the cost of debt is 6 percent and the tax rate is 35 percent, what percentage of interest does…

A: Given,Cost of Debt = 6%Tax Rate = 35%The cost of debt is typically expressed as the after-tax cost…

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: With its current leverage, Impi Corporation will have net income next year of $5.0 million. If…

A: The concept of the corporate finance interest tax shield. The tax benefits a business receives from…

Q: Crafty Inc. borrowed $10,000 with a five-year 11.26% annual interest rate on 10/1/20X1. On their…

A: Borrowing is a kind or form of loan being taken in business. Interest expense needs to be incurred…

Q: The Cost of Debt and Flotation Costs. Suppose a company will issue new 20-year debt with a par value…

A: The after-tax cost of debt refers to the effective interest rate that a company pays on its debt…

Q: Last year, Cayman Corporation had sales of $6,608,800, total variable costs of $2,695,237, and total…

A: Degree of Combined Leverage= Contribution / Earnings before tax=( Sales - Variable cost ) / ( Sales…

Q: ABC Corp. has $50 in earnings before interest and taxes (EBIT), $200 in debt with an interest rate…

A: The tax shield is the reduction in income taxes that results from taking an allowable deduction from…

Q: Last year, Cayman Corporation had sales of $7 million, total variable costs of $2 million, and total…

A: Variable costs are costs which changes with change in activity level. Fixed costs do not change with…

Q: Over the last year, your holding period return on your investments has been 6.60%. Over the same…

A: To calculate the real after-tax return we will use the below formula Real after tax return =…

Q: Suppose a firm has $10 million in debt that it expects to hold in perpetuity. It the interest rate…

A: The following information has bee provided in the question: Amount of debt= $10 million Interest…

Q: every year into perpetuity. The firm currently has no debt, but it can borrow at 10% per annum. The…

A: Firm Value: It represents the sum of all the creditor's claims & shareholders. It can be…

Q: ECB borrows $1,000,000 USDs by issuing 6-year bonds. ECB's cost of debt is 5%, so it will need to…

A: The interest tax shield is a financial concept that highlights the tax advantages associated with…

Q: Without leverage, Impi Corporation will have net income next year of $7.5 million. If Impi's…

A: Earnings before interest and taxes can be computed after deducting the cost of goods sold from the…

Q: Your firm currently has $76 million in debt outstanding with a 9% interest rate. The terms of the…

A: Interest tax shield refers to the less tax paid due to high cost of interest. To calculate the tax…

Q: Vonte Company has a 21 percent tax rate. Its total interest payment for the year just ended was…

A: The interest expense paid by a company is tax deductible. This reduces the taxable income for a…

Q: Sparkling Water, Incorporated, expects to sell 3.7 million bottles of drinking water each year in…

A: Number of bottles sold = 3,700,000Selling Price = $1.46Tax Rate = 23%Revenue at the end of the year…

Q: What is the cost of debt if a company has $100,000 of debt with an annual interest rate of 5% and an…

A: Solution:- Calculation of debt as follows under:- Introduction:- Company has debt of $100,000 Annual…

Question

100%

Vonte Company has a 25 percent tax rate. Its total interest payment for the year just ended was $22.3 million. What is the interest 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

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Similar questions

Ivanhoe Corporation has $310 million of debt outstanding at an interest rate of 9 percent. What is the dollar value of the tax shield on that debt, just for this year, if Ivanhoe is subject to a 35 percent marginal tax rate?
SETAL has an unlevered cost of equity equal to 11.5% and a tax rate of 16%. In years one, two, and three, the expected interest expenses are $142, $255, and $312, respectively. After Year 3, the interest expenses are forecasted to increase at a constant 4.5% each year. What is the horizon value of the interest tax shield?
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 firm receives a $4.34 million order on the last day of the year. You fill the order with $1.82 million worth of inventory. The customer picks up the entire order the same day and pays $1.17 million up front in cash; you also issue a bill for the customer to pay the remaining balance of $3.17 million within 40 days. Suppose your firm's tax rate is 0% (i.e., ignore taxes). Determine the consequences of this transaction for each of the following: d. Inventory e. Cash a. Revenues b. Earnings c. Receivables a. Revenues Revenues will increase by $ million. (Select from the drop-down menu and round to two decimal places.) b. Earnings Earnings will increase by $ million. (Select from the drop-down menu and round to two decimal places.) c. Receivables Receivables will increase by $ million. (Select from the drop-down menu and round to two decimal places.) d. Inventory Inventory will decrease by $ million. (Select from the drop-down menu and round to two decimal places.) е. Cash…
You just borrowed $15,000 from a finance company to start a business. If you are required to repay $16,800 interest and principal in one year, what is the nominal interest rate that the finance company is charging? If inflation is 2.5%, what is the expected real rate of interest?
Ernie's has 3,500 bonds outstanding with a face value of $1,000 each and a coupon rate of 8.5 percent. What is the amount of the annual interest tax shield if the tax rate is 34 percent?
Assume that CVC Corp.'s marginal tax rate is 35%, investors in CVC pay a 15% tax rate on income from equity and a 35% tax rate on interest income. CVC is equally likely to have EBIT this coming year of $20 million, $25 million, or $30 million. What is the effective tax advantage of debt if CVC has interest expenses of $8 million this coming year?
An investment of $1,000 earns annual interest of 5% (no capital gains). Assuming accrual taxes of 30%, the expected after-tax value of the investment in ten years is closest to: In Question 1, the tax drag in percentage terms is closest to:
Braxton Enterprises currently has debt outstanding of $45 million and an interest rate of 10%. Braxton plans to reduce its debt by repaying $9 million in principal at the end of each year for the next five years.If Braxton's marginal corporate tax rate is 21%, what is the interest tax shield from Braxton's debt in each of the next five years? (Round to three decimal places.)
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%
Sandyhorse Corp. has $370 million of debt outstanding at an interest rate of 14 percent. What is the present value of the interest tax shield if the debt has no maturity and if Sandyhorse is subject to a 30 percent marginal tax rate? $_________
juanita's steak house has 12,000 of debt outstanding that is selling at par and has a coupon rate of 8%. the tax rate is 34%. what is the present value of the tax shield?

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS