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
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Textbook Question
Chapter 17, Problem 23P
Redo Problem 22., but assume that Kay must pay a corporate tax rate of 35%, and investors pay no taxes.
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The personal tax on interest payments is 33%.The personal tax rate on equity capital gain is 15%.The corporate tax is 35%.Given all these tax rates and all otehr factors are kept constant,will investors have a preference to debt or equity?
A.Cannot determine from the information provided
B.Debt is preferred to equity
C.Equity is preferred to debt
D.M-M proposition I holds and the investors are indifferent between debt and equity
Dollar General (DG) is choosing between financing itself with only equity or with debt and equity. Regardless of how it finances itself, the EBIT for DG will be $545.63 million. If DG does use debt, the interest expense will be $57.85 million. If DG‘s corporate tax rate is 0.30, how much will DG pay (in millions) in total to ALL investors if it uses both debt and equity?
Instruction: Type ONLY your numerical answer in the unit of millions
4
Chapter 17 Solutions
Corporate Finance Plus MyLab Finance with Pearson eText -- Access Card Package (4th Edition) (Berk, DeMarzo & Harford, The Corporate Finance Series)
Ch. 17.1 - Prob. 1CCCh. 17.1 - Prob. 2CCCh. 17.2 - Prob. 1CCCh. 17.2 - In a perfect capital market, how important is the...Ch. 17.3 - Prob. 1CCCh. 17.3 - Prob. 2CCCh. 17.4 - Prob. 1CCCh. 17.4 - Prob. 2CCCh. 17.5 - Is there an advantage for a firm to retain its...Ch. 17.5 - Prob. 2CC
Ch. 17.6 - Prob. 1CCCh. 17.6 - Prob. 2CCCh. 17.7 - Prob. 1CCCh. 17.7 - Prob. 2CCCh. 17 - Prob. 1PCh. 17 - ABC Corporation announced that it will pay a...Ch. 17 - Prob. 3PCh. 17 - RFC Corp. has announced a 1 dividend. If RFCs...Ch. 17 - Prob. 5PCh. 17 - KMS Corporation has assets with a market value of...Ch. 17 - Natsam Corporation has 250 million of excess cash....Ch. 17 - Suppose the board of Natsam Corporation decided to...Ch. 17 - Prob. 9PCh. 17 - Suppose BE Press paid dividends at the end of each...Ch. 17 - The HNH Corporation will pay a constant dividend...Ch. 17 - Prob. 12PCh. 17 - Prob. 13PCh. 17 - Prob. 14PCh. 17 - Suppose that all capital gains are taxed at a 25%...Ch. 17 - Prob. 16PCh. 17 - Prob. 17PCh. 17 - Prob. 18PCh. 17 - Prob. 19PCh. 17 - A stock that you know is held by long-term...Ch. 17 - Clovix Corporation has 50 million in cash, 10...Ch. 17 - Assume capital markets are perfect. Kay Industries...Ch. 17 - Redo Problem 22., but assume that Kay must pay a...Ch. 17 - Harris Corporation has 250 million in cash, and...Ch. 17 - Redo Problem 22, but assume the following: a....Ch. 17 - Prob. 26PCh. 17 - Use the data in Table 15.3 to calculate the tax...Ch. 17 - Explain under which conditions an increase in the...Ch. 17 - Why is an announcement of a share repurchase...Ch. 17 - AMC Corporation currently has an enterprise value...Ch. 17 - Prob. 31PCh. 17 - Prob. 32PCh. 17 - Explain why most companies choose to pay stock...Ch. 17 - Prob. 34PCh. 17 - Prob. 35P
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- 8. M&M and Miller models After Modigliani and Miller's (MM) original no-tax theory, they went on to develop another theory that included corporate taxes. Subsequently, Miller developed another theory that included the effects of both corporate and personal taxes. Complete the following sentence based on your understanding of the MM Model with corporate taxes: MM's model that included the existence of corporate taxes concluded that 100% Alumiscape Corporation has no debt, and a value of $40.000 million. Metallica Metals is otherwise identical but has $16.000 million of debt in its capital structure. Under the different models, what is the value of Metallica Metals if its corporate tax rate is 30%, the personal tax rate on equity is 10%, and the personal tax rate on debt is 28%? (Note: Do not round intermediate calculations.) Model MM without taxes MM with corporate taxes Miller with corporate and personal taxes Consider the following information: Is the preceding information correct?…arrow_forwardWhat is the relative tax advantage of corporate debt if the corporate tax rate is Tc=0.35, the personal tax rate is Tp=0.35, but all equity income is received as capital gains and escapes tax entirely ( T pE =0)? How does the relative tax advantage change if the company decides to pay out all equity income as cash dividends that are taxed at 15%?arrow_forwardCan i please get help with the practice question, i attached it below. Thank you. I need it soon tooarrow_forward
- 21. Taxes and the Cost of Capital. Here are book- and market-value balance sheets of the United Frypan Company (figures in $ millions): BOOK-VALUE BALANCE SHEET Net working capital $ 20 Debt $ 40 Long-term assets 80 Equity 60 $100 $100 MARKET-VALUE BALANCE SHEET Net working capital $ 20 Debt $ 40 Long-term assets 140 Equity 120 $160 $160arrow_forward3arrow_forwardAnswer the following questions based on the information in the table. Assume a tax rate of 30 percent. For simplicity, assume that the companies have no other liabilities other than the debt shown. (All dollars are in millions.) \table[[,\table[[Atlantic],[Corporation]],Pacific],[Earnings before interest and taxes,$470,$470arrow_forward
- Explain Why you agree or disagree with the following statement. The answer should not be more than 3 sentences. Be specific in your answer and write only the most relevant explanations MM Proposition I with no tax supports the argument that a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distressarrow_forwardIn a Modiqliani and Miller world with corporate taxes, companies A and B are identical except for their capital structure. While A is unlevered, D>0. Let T denote the corporate tax rate. Which of the following statement is False? A. The value of B’s equity is larger than the value of A’s equity B. The total value of B is larger than the total value of A C. The value of B’s debt is larger than the value of A’s debt D. The difference in the total value of the two companies is equal to TDarrow_forward15. In comparison to the case when there is only corporate tax, the benefit of debt tends to when there are both corporate and personal taxes. A. remain the same B. be smaller D. be greater for risky firms but smaller for safe firms C. be greaterarrow_forward
- Please, help me out with this question.arrow_forwardCh. 16. Which one of the following is not a characteristic of Modigliani-Miller Propositions with corporate taxes? Group of answer choices The cost of equity rises with leverage because the risk to equity rises with leverage There are no taxes Corporations are taxed at the rate TC on earnings after interest There are no transaction or bankruptcy costs individuals and corporations borrow at the same ratearrow_forward6. Problem 15-06 (Miller Model with Corporate and Personal Taxes) BA eBook Miller Model with Corporate and Personal Taxes Cruz Corporation has $100 billion of debt outstanding. An otherwise identical firm has no debt and has a market value of $350 billion. Under the Miller model, what is Cruz's value if the federal-plus-state corporate tax rate is 28%, the effective personal tax rate on stock is 17%, and the personal tax rate on debt is 29%? Enter your answer in billions. For example, an answer of $1.23 billion should be entered as 1.23, not 1,230,000,000. Round your answer to two decimal places. $ billionarrow_forward
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