Intermediate Financial Management
Intermediate Financial Management
14th Edition
ISBN: 9780357516782
Author: Brigham, Eugene F., Daves, Phillip R.
Publisher: Cengage Learning
Question
Book Icon
Chapter 17, Problem 1Q

a)

Summary Introduction

To determine: The definition of interest tax shield and value of tax shield.

a)

Expert Solution
Check Mark

Explanation of Solution

The interest tax shield is the amount of cash flow shielded from taxes due to interest tax deductibility. It's the same as rd(D)(T). The tax shield's benefit is the present value of future tax income from interest payment deductibility. The tax shield's value depends on the rate (rTS) used to offset future annual tax shields. In the tax model of the MM, rTS=rd

Because MM assume zero growth, the value of the tax shield is T(D).  If growth is constant, then the value of the tax shield is rdTD(1+gL)(rTSgL). Where rd is the interest rate on the debt and rTS is the discount rate for the tax shield.

b)

Summary Introduction

To determine: The definition of adjusted present value (APV) model.

b)

Expert Solution
Check Mark

Explanation of Solution

The adjusted present-value model discounts expected free cash flows at rTS's unlevered cost of equity and discounts interest tax shields.

c)

Summary Introduction

To determine: The definition of compressed adjusted present value (CAPV) model.

c)

Expert Solution
Check Mark

Explanation of Solution

The condensed modified present-value method discounts expected free cash flows at the unlevered equity cost and also discounted interest tax shields at the unlevered equity cost to determine the value of transactions. It is called the compact APV because there is a discount on the FCF and tax shields at the same price.

d)

Summary Introduction

To determine: The definition of free cash flow to equity model.

d)

Expert Solution
Check Mark

Explanation of Solution

This then reduces the FCFEs to hit the price of capital in operations at the leveraged cost of equity. You apply non-operating capital to the value and you get the equity value. You then apply the price of the loan to the value of the transactions. First, the free cash flow for the equity model, or the residual dividend model, measures FCFE, the free cash flow owned by shareholders. FCFE is less interest in cost-free cash flow plus interest tax shield.

Want to see more full solutions like this?

Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Students have asked these similar questions
Crenshaw, Incorporated, is considering the purchase of a $367,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be $67,000 in five years. The computer will replace five office employees whose combined annual salaries are $112,000. The machine will also immediately lower the firm's required net working capital by $87,000. This amount of net working capital will need to be replaced once the machine is sold. The corporate tax rate is 22 percent. The appropriate discount rate is 15 percent. Calculate the NPV of this project. Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. NPV Answer is complete but not entirely correct. S 103,141.80
Your firm is contemplating the purchase of a new $610,000 computer-based order entry system. The system will be depreciated straight-line to zero over its five-year life. It will be worth $66,000 at the end of that time. You will save $240,000 before taxes per year in order processing costs, and you will be able to reduce working capital by $81,000 (this is a one-time reduction). If the tax rate is 21 percent, what is the IRR for this project? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. IRR %
QUESTION 1 Examine the information provided below and answer the following question. (10 MARKS) The hockey stick model of start-up financing, illustrated by the diagram below, has received a lot of attention in the entrepreneurial finance literature (Cumming & Johan, 2013; Kaplan & Strömberg, 2014; Gompers & Lerner, 2020). The model is often used to describe the typical funding and growth trajectory of many startups. The model emphasizes three main stages, each of which reflects a different phase of growth, risk, and funding expectations. Entrepreneur, 3 F's Debt(banks & microfinance) Research Business angels/Angel Venture funds/Venture capitalists Merger, Acquisition Grants investors PO Public market Growth (revenue) Break even point Pide 1st round Expansion 2nd round 3rd round Research commercial idea Pre-seed Initial concept Seed Early Expansion Financial stage Late IPO Inception and prototype Figure 1. The hockey stick model of start-up financing (Lasrado & Lugmayr, 2013) REQUIRED:…
Knowledge Booster
Background pattern image
Recommended textbooks for you
Text book image
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Text book image
Financial Management: Theory & Practice
Finance
ISBN:9781337909730
Author:Brigham
Publisher:Cengage
Text book image
College Accounting, Chapters 1-27
Accounting
ISBN:9781337794756
Author:HEINTZ, James A.
Publisher:Cengage Learning,
Text book image
Entrepreneurial Finance
Finance
ISBN:9781337635653
Author:Leach
Publisher:Cengage
Text book image
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Text book image
Principles of Accounting Volume 2
Accounting
ISBN:9781947172609
Author:OpenStax
Publisher:OpenStax College