Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Chapter 18, Problem 2PS
Tax shields Here are book and market value
Assume that MM’s theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 40% corporate tax rate.
- a. How much of the firm’s value in dollar terms is accounted for by the debt-generated tax shield?
- b. How much better off will UF’s shareholders be if the firm borrows $20 more and uses it to repurchase stock?
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Students have asked these similar questions
Taking the corporate taxes into account, if there is no possibility of financial distress, a firm can maximize its market value when the:
firm uses a debt-equity ratio of 1.0.
firm uses the maximum amount of debt in its capital structure.
firm uses no debt in its capital structure.
corporate tax rate approaches 100%.
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.
Assume that there is corporate tax, but no other frictions. Based on the propositions of Modigliani and Miller, which statement is the least accurate?
Oa. The weighted cost of capital decreases as the leverage ratio increases.
D. The cost of debt increases as the leverage ratio increases.
C. Firm value increases as the firm takes on more debts.
d. The cost of equity increases as the leverage ratio increases.
O e. The optimal structure is 100% debt.
Chapter 18 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 18 - Prob. 1PSCh. 18 - Tax shields Here are book and market value balance...Ch. 18 - Prob. 3PSCh. 18 - Tax shields The firm cant use interest tax shields...Ch. 18 - Financial distress This question tests your...Ch. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Debt ratios Rajan and Zingales identified four...Ch. 18 - Prob. 9PSCh. 18 - Pecking-order theory Fill in the blanks: According...
Ch. 18 - Financial slack For what kinds of companies is...Ch. 18 - Tax shields Compute the present value of interest...Ch. 18 - Tax shields Suppose that Congress sets the top...Ch. 18 - Tax shields The trouble with MMs argument is that...Ch. 18 - Tax shields Look back at the Johnson Johnson...Ch. 18 - Agency costs Let us go back to Circular Files...Ch. 18 - Agency costs The Salad Oil Storage (SOS) Company...Ch. 18 - Prob. 20PSCh. 18 - Agency costs The possible payoffs from Ms....Ch. 18 - Leverage targets Some corporations debtequity...Ch. 18 - Prob. 25PSCh. 18 - Trade-off theory The trade-off theory relies on...
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- Which of the following makes this a true statement? In this slightly more realistic world with corporate taxes, managers can: Multiple Choice maximize the firm's value by taking on as much equity as possible. maximize the firm's value by taking on as much debt as possible. minimize the firm's value by taking on as much debt as possible. maximize the firm's value by financing only with debt.arrow_forwardonly looking for parts c-1 and c-3arrow_forward21. 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_forward
- Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?Corporate tax rate: 35%Personal tax rate on income from bonds: 25%Personal tax rate on income from stocks: 30% A. $-0.625 B. $0.287 C. $0.393 D. $0.635 E. None of thesearrow_forwardM&M Proposition I, without taxes, is referred to as the pie model. Explain why the size of the pie remains constant as the debt-equity ratio of a firm increases.arrow_forwardHow would each of the following factors affectratio analysis? (a) The firm’s sales are highly seasonal. (b) The firm uses some type of windowdressing. (c) The firm issues more debt and usesthe proceeds to repurchase stock. (d) The firmleases more of its fixed assets than most firmsin its industry. (e) In an effort to stimulate sales,the firm eases its credit policy by offering 60-daycredit terms rather than the current 30-day terms.How might one use sensitivity analysis to helpquantify the answers?arrow_forward
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