Concept explainers
a)
To determine: The amount earned by debt holders after paying the taxes.
Introduction:
A debt holder is the owner of corporate bond or municipal bond. An investor may buy securities specifically from the issuing element or on the optional market if the first debt-holder chooses to offer before development.
Bondholders are qualified for an arrival of essential when the bond develops and expect for the individual who claim zero-coupon bonds, periodical interest in the form of coupon payments.
b)
To determine: The amount of dividend Firm X needs to cut each year to pay the interest expenses.
Introduction:
A debt holder is the owner of corporate bond or municipal bond. An investor may buy securities specifically from the issuing element or on the optional market if the first debt-holder chooses to offer before development.
Bondholders are qualified for an arrival of essential when the bond develops and, expect for the individual who claim zero-coupon bonds, periodical interest in the form of coupon payments.
c)
To determine: The amount of cut in dividend that will decrease the equity holder’s after-tax income annually.
Introduction:
An equity holder is any individual who has a stake in responsibility for organisation, and an investor is one kind of equity holder. An organisation can offer stock specifically and value when all is said in done as an approach to back ventures or cover working obligation, developments or different expenses.
d)
To determine: The amount received by the government in total tax revenue each year.
Introduction:
A tax income is defined as the income gathered from charges on salary and benefits, government disability commitments, charges exacted on products and ventures, finance charges, assesses on the proprietorship and exchange of property, and different duties.
e)
To determine: The effective tax advantage of debt.
Introduction:
The effective tax rate is the normal tax assessment rate for a partnership or person. The effective tax rate for people is the normal rate, at which their earned income is taxes, and the effective tax rate for an organisation is the normal rate, at which its pre-charged taxes are taxed.
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Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
- Suppose a firm has $10 million in debt that it expects to hold in perpetuity. It the interest rate is 7 percent and the corporate tax rate is 35 percent, what is the value of the interest tax shield?arrow_forwardIn 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 abovearrow_forwardYour company has a pre-tax cost of debt of 6%. You anticipate the corporate tax rate will go from 21% to 28% in the near future. What impact will the tax change have on your debt cost of capital as an input to your overall cost of capital?arrow_forward
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- Widgets 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_forwardPlease give me answerarrow_forwardYour firm currently has $96 million in debt outstanding with a 8% interest rate. The terms of the loan require the firm to repay $24 million of the balance each year. Suppose that the marginal corporate tax rate is 21%, and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt? The present value of the interest tax shields is $ million. (Round to two decimal places.)arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning