Given answer General accounting question Westside Corporation has 25 million sharesoutstanding with a market price of $30 per share andno debt. Westside has had consistently stable earningsand pays a 28% tax rate. Management plans to borrow$300 million on a permanent basis through a leveragedrecapitalization in which they would use the borrowedfunds to repurchase outstanding shares. The presentvalue of Westside's interest tax shield is closest to:

To find the present value of the interest tax shield, we use the formula: PV of Tax Shield=Debt×Tax…

Answered: Westside Corporation has 25 million…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 7P

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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.)
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?
Southside Systems has $350million of outstanding debt with a 6% required rate of return. Southside has a required return on assets of 13%, an EBIT of $44million, and a corporate tax rate of 20%. a. Calculate Southside's present value of the debt tax shields and total firm value. b. Calculate Southside's gain from leverage if there are personal taxes of 27% on stock income and 32% on debt income. Question content area bottom Part 1 a. Southside's present value of the debt tax shields is $ enter your response here. (Round to the nearest dollar.)
Tool Manufacturing has an expected EBIT of $ 69,000 in perpetuity and a tax rate of 23 percent. The firm has $200,000 in outstanding debt at an interest rate of 4.5 percent, and its unlevered cost of capital is 10.4 percent. What is the value of the firm according to M&M Proposition I with taxes?
ces NoNuns Companies has a 21 percent tax rate and has $350 million in assets, currently financed entirely with equity. Equity is worth $37 per share, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Probability of state Expected EBIT in state Recession 0.25 $ 5 million EBIT Average 0.55 $ 10 million Boom 0.20 $ 17 million The firm is considering switching to a 20-percent-debt capital structure, and has determined that it would have to pay an 8 percent yield on perpetual debt in either event. What will be the break-even level of EBIT? Note: Round intermediate calculations. Enter your answer in dollars not millions and round your final answer to the nearest whole dollar amount.
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
Planet Express has liabilities of $400 and assets of $1000. The average YTM on its debt is 10% and the tax rate is 20%. The company has announced $1 annual dividends in perpetuity and has a stock price of $5. What is the company’s weighted average cost of capital (WACC)? Why is the tax rate included in the WACC? How can the WACC be used to evaluate potential investments?
Target Corporation (TGT) has $2.14 million in assets that are currently financed with 100% equity. TGT’s EBIT is $385,000, and its tax rate is 25%. If TGT changes its capital structure to include 50% debt, its return on equity will increase. Assume the interest rate on debt is free. (justify your answer with numerical calculation) True False
Flagstaff Enterprises expected to have free cash flow in the coming year of $8 million, and this free cash flow is expected to grow at a rate of 3% per year thereafter. Flagstaff has an equity cost of capital of 13%, a debt cost of capital of 7%, and it is in the 35% corporate tax bracket. Flagstaff maintains a constant debt-to-equity ratio of 0.5. Assume that capital markets are perfect except for the existence of corporate taxes. a)What is Flagstaff's after-tax WACC? b)What is the value of Flagstaff as a levered firm? c)What is the value of Flagstaff's interest tax shield? d)Briefly discuss the trade-off theory. What is the optimal capital structure according to the trade-off theory?
The Black Bird Company plans an expansion. The expansion is to be financed by selling $21 million in new debt and $57 million in new common stock. The before-tax required rate of return on debt is 9.77% percent and the required rate of return on equity is 13.11% percent. If the company is in the 34 percent tax bracket, what is the weighted average cost of capital?
a) Rendezvous Ltd. expects its EBIT to be $100,000 every yearforever. The firm can borrow at 11 percent. Bruce currently hasno debt, and its cost of equity is 18 percent. The tax rate is31 percent. Bruce will borrow $61,000 and use the proceeds torepurchase shares. What will the WACC be after recapitalization?b) Provide at least two circumstances, where interest tax-shieldwill have no value for a company.c) Your firm has a debt-equity ratio of 0.60. Your cost of equityis 11 percent and your after-tax cost of debt is 7 percent. Whatwill your cost of equity be if the target capital structurebecomes a 50/50 mix of debt and equity?Question 2: 10 marksa) Everystate Inc. is evaluating an extra dividend versus a sharerepurchase. In either case, $9,000 would be spent. Currentearnings are $1.30 per share and the stock currently sells for$64 per share. There are 1,000 shares outstanding. In answeringthe questions that follow, ignore taxes for the first two:i) Evaluate the two choices in terms of…
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

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