Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
4th Edition
ISBN: 9780134408897
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 15, Problem 13P
NatNah, a builder of acoustic accessories, has no debt and an equity cost of capital of 15%. Suppose NatNah decides to increase its leverage and maintain a market debt-to-value ratio of 0.5. Suppose its debt cost of capital is 9% and its corporate tax rate is 35%. If NatNah’s pretax WACC remains constant, what will its (effective after-tax) WACC be with the increase in leverage?
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
NatNah, a builder of acoustic accessories, has no debt and an equity cost of capital of 14%. Suppose NatNah
decides to increase its leverage to maintain a market debt-to-value ratio of 0.5. Suppose its debt cost of capital is
9% and its corporate tax rate is 37%. If NatNah's pre-tax WACC remains constant, what will be its (effective after-
tax) WACC with the increase in leverage?
The effective after-tax WACC will be 12.34 %. (Round to two decimal places.)
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).
XYZ Transcontinental currently has no debt and an equity cost of capital of 16%. Suppose that XYZ decides to increase its leverage and maintain a market debt-to-value ratio of 1/3. Suppose XYZ's debt cost of capital is 9% and its corporate tax rate is 35%. Assuming that XYZ's pre-tax WACC remains constant, then with the addition of leverage its effective after-tax WACC will be closest to:
Chapter 15 Solutions
Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 15.1 - With corporate income taxes, explain why a firms...Ch. 15.1 - Prob. 2CCCh. 15.2 - With corporate taxes as the only market...Ch. 15.2 - How does leverage affect a firms weighted average...Ch. 15.3 - How can shareholders benefit from a leveraged...Ch. 15.3 - How does the interest tax shield enter into the...Ch. 15.4 - Prob. 1CCCh. 15.4 - How does this personal tax disadvantage of debt...Ch. 15.5 - How does the growth rate of a firm affect the...Ch. 15.5 - Do firms choose capital structures that fully...
Ch. 15 - Prob. 1PCh. 15 - Grommit Engineering expects to have net income...Ch. 15 - Suppose the corporate tax rate is 40%. Consider a...Ch. 15 - Braxton Enterprises currently has debt outstanding...Ch. 15 - Your firm currently has 100 million in debt...Ch. 15 - Arnell Industries has just issued 10 million in...Ch. 15 - Prob. 7PCh. 15 - Prob. 8PCh. 15 - Safeco Inc. has no debt, and maintains a policy of...Ch. 15 - Rogot Instruments makes fine violins and cellos....Ch. 15 - Rumolt Motors has 30 million shares outstanding...Ch. 15 - Summit Builders has a market debt-equity ratio of...Ch. 15 - NatNah, a builder of acoustic accessories, has no...Ch. 15 - Restex maintains a debt-equity ratio of 0.85, and...Ch. 15 - Acme Storage has a market capitalization of 100...Ch. 15 - Milton Industries expects free cash flow of 5...Ch. 15 - Prob. 17PCh. 15 - Kurz Manufacturing is currently an all-equity firm...Ch. 15 - Rally, Inc., is an all-equity firm with assets...Ch. 15 - Prob. 20PCh. 15 - Facebook, Inc. had no debt on its balance sheet in...Ch. 15 - Markum Enterprises is considering permanently...Ch. 15 - Garnet Corporation is considering issuing...Ch. 15 - Suppose the tax rate on interest income is 35%,...Ch. 15 - With its current leverage, Impi Corporation will...Ch. 15 - Colt Systems will have EBIT this coming year of 15...Ch. 15 - PMF, Inc., is equally likely to have EBIT this...
Additional Business Textbook Solutions
Find more solutions based on key concepts
The exchange rate, potential risk, transfer pricing, tax law differences and strategies are the items affects t...
Gitman: Principl Manageri Finance_15 (15th Edition) (What's New in Finance)
The Net Present Value, IRR and PI for each plant expansion and its acceptability. Introduction: The difference ...
Principles of Managerial Finance (14th Edition) (Pearson Series in Finance)
(Cost of equity) In the spring of 2018, the Brille Corporation was involved in issuing new common stock at a ma...
Foundations Of Finance
Assume that the bonds are selling for the following amounts:
Microsoft $1,100
GE Capital $1,030
Morgan Stanley ...
Foundations of Finance (9th Edition) (Pearson Series in Finance)
If a $1,000 bond is selling for 95.5, how much cash does the bondholder pay for the bond? If a $1,000 bond is s...
Financial Accounting
2-7. The Boston Consulting Group (BCG) Matrix is a useful strategic tool. Another classic portfolio planning me...
Marketing: An Introduction (13th Edition)
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- 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.arrow_forwardXYZ Fried Chicken is trying to determine its WACC at the optimal capital structure. The firm now has only debt and equity, and estimates that it will continue to use only debt and equity in the future also. It has determined that the optimal capital structure is given by a debt-to-equity ratio of 0.5. At this ratio, its pre-tax cost of debt is 6%. It has estimated that if it had no debt, then its beta would be 1.2. Assume the risk-free rate is 2% and the market risk premium is 8%. Assume the firm? ’s tax rate is 40%. Based on this information, what is the WACC at the optimal capital structure?arrow_forwardWidgets Inc has an expected EBIT of $64,000 in perpetuity and a tax rate of 35 percent. The firm has$95,000 in outstanding debt at an interest rate of 8.5 percent, and its unlevered cost of capital is 15percent. What is the value of the firm according to M&M Proposition I with taxes? Should the companychange its debt–equity ratio if the goal is to maximize the value of the firm? Explain.arrow_forward
- Consider this case: Globex Corp. has a capital structure that consists of 30% debt and 70% equity. The firm’s current beta is 1.25, but management wants to understand Globex Corp.’s market risk without the effect of leverage. If Globex Corp. has a 25% tax rate, what is its unlevered beta? 0.90 0.81 1.09 0.95arrow_forward(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%arrow_forwardTheresa’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?arrow_forward
- 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)arrow_forwardGiven 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?arrow_forwardXYZ is considering altering its capital structure. Currently it has 40% debt and 60% equity. XYZ's levered beta is 2.0 under its current capital structure. The firm's tax rate is 40% which will not change if the capital structure is altered. What is the value of the levered beta if XYZ changes its capital structure to 50% debt, 50% equity? show your answer to 1 decimal place (example: a beta of 1.2)arrow_forward
- Horford Co. has no debt. Its cost of capital is 10 percent. Suppose the company converts to a debt-equity ratio of 1. The interest rate on the debt is 7.1 percent. Ignore taxes for this problem. a.What is the company’s new cost of equity? b.What is its new WACC?arrow_forward9. Determining the optimal capital structure Aa Aa Understanding the optimal capital structure Review this situation: Universal Exports Inc. is trying to identify its optimal capital structure. Universal Exports Inc. has gathered the following financial information to help with the analysis. Debt Ratio Equity Ratio rd rs WACC 30% 70% 7.00% 10.50% 8.61% 40% 60% 7.20% 10.80% 8.21% 50% 50% 7.70% 11.40% 8.01% 60% 40% 8.90% 12.20% 8.08% 70% 30% 10.30% 13.50% 8.38% Which capital structure shown in the preceding table is Universal Exports Inc.'s optimal capital structure? Debt ratio = 40%; equity ratio = 60% Debt ratio 50%; equity ratio = 50% Debt ratio = 70%; equity ratio 30% Debt ratio = 30%; equity ratio = 70% Debt ratio = 60%; equity ratio = 40% Consider this case: Globo-Chem Co. is an all-equity firm, and it has a beta of 1. It is considering changing its capital structure to 65% equity and 35% debt. The firm's cost of debt will be 8%, and it will face a tax rate of 40%.arrow_forwardMilton 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.)arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author: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 ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
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
Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY