Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 17, Problem 2P
Summary Introduction
To determine: The value of the levered firm.
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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
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.
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).
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- You have the following data for your company. Market Value of Equity: $520 Book Value of Debt: $130 Required rate of return on equity: 12% Required rate of return on debt (pre-tax): 7% Corporate tax rate: 25% The company's debt is assumed to be is reasonably safe, so the book value of debt is a reasonably approximation for the market value of debt. What is the weighted average cost of capital for this company?arrow_forwardAn unlevered firm has a value of $500 million. An otherwise identical butlevered firm has $50 million in debt. Under the MM zero-tax model, whatis the value of the levered firm?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_forward
- 1. An unlevered firm has a value of R600 million. An otherwise identical but levered firm has R240 million in debt. Under the Miller model, what is the value of the levered firm if the corporate tax rate is 34%, the personal tax rate on equity is 10%, and the personal tax rate on debt is 35%?arrow_forward(c) Consider the case of two firms, ABC which is an unlevered firm and XYZ which is a levered firm. The firms have target debt-to-equity ratio (B/S) = 1, and both firms have exactly the same perpetual net operating income of Kshs.12 million before taxes. The before-tax cost of debt, kp, is the same as the risk-free rate and the corporate tax rate is 30%. Given the following market parameters: E(Rm) = 0.12, Rf = 6%. Вавс — 1, Bxyz = 1.5 (i). Find the cost of capital of each firm. (ii). Find the value of each firm.arrow_forwardYou are considering two identical firms one levered the other not. Both firms have expected EBIT of $600. The value of the unlevered firm (vU) is $2000. The corporate tax rate (t) is 30%. The cost of debt (rD) is 10%, and the ratio of debt to equity (D/E) is 1 for the levered firm. (a) Calculate the cost of equity for both the levered (rL) and unlevered firms (rU). (b) Calculate the weighted average cost of capital for each firm. (c) Why is the cost of equity higher for the levered firm, but the WACC lower? (d) In an MM world without taxes, what is the optimal capital structure?arrow_forward
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