Financial Management: Theory & Practice
15th Edition
ISBN: 9781337248006
Author: Eugene F. Brigham; Michael C. Ehrhardt
Publisher: Cengage Learning US
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Question
Chapter 21, Problem 6P
a.
Summary Introduction
To calculate:
Value of unlevered firm
b.
Summary Introduction
To calculate:
Value of levered firm and
c.
Summary Introduction
To calculate: Value of levered firm and cost of equity levered.
d.
Summary Introduction
To discuss: The difference in part b and part c.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax rate is 31 percent.
Given the above information;
a) Complete the table given below for varying levels of debt below by using a mix of the given information and using your own computations.
EBIT
$100,000.00
Cost of debts
11%
cost of equity when unlevered
18%
Tax rate
31%
Debts
$0
$10,000.00
$20,000.00
$30,000.00
Cost of Equity when levered
Equity
D/E
Vu
VL
WACC
b) Plot the results from the table into the following two graphs:i) Value of the firm vis-à-vis- Total debtii) Cost of capital of the firm vis-à-vis D/E ratio.iii) Which MM propositions have you demonstrated?
Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax rate is 31 percent.
Given the above information;
a) Complete the table given below for varying levels of debt below by using a mix of the given information and using your own computations.
EBIT
$100,000.00
Cost of debts
11%
cost of equity when unlevered
18%
Tax rate
31%
Debts
$0
$10,000.00
$20,000.00
$30,000.00
Cost of Equity when levered
Equity
D/E
Vu
VL
WACC
b) Plot the results from the table into the following two graphs:i) Value of the firm vis-à-vis- Total debtii) Cost of capital of the firm vis-à-vis D/E ratio.iii) Which MM propositions have you demonstrated?
Please show the graphs.
Your company’s assets have an unlevered value of 25,456,890 USD and the perpetual annual unlevered cash produced is 1,750,000 USD. The Company decides to go through with a recapitalization, after which the debt-to-equity ratio (which the company decides to keep constant) is equal to 2.5. What is the value of debt if the interest rate is 2.45% and the tax rate is 36%?
Chapter 21 Solutions
Financial Management: Theory & Practice
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- The Berndt Corporation expects to have sales of 12 million. Costs other than depreciation are expected to be 75% of sales, and depreciation is expected to be 1.5 million. All sales revenues will be collected in cash, and costs other than depreciation must be paid for during the year. Berndts federal-plus-state tax rate is 40%. Berndt has no debt. a. Set up an income statement. What is Berndts expected net income? Its expected net cash flow? b. Suppose Congress changed the tax laws so that Berndts depreciation expenses doubled. No changes in operations occurred. What would happen to reported profit and to net cash flow? c. Now suppose that Congress changed the tax laws such that, instead of doubling Berndts depreciation, it was reduced by 50%. How would profit and net cash flow be affected? d. If this were your company, would you prefer Congress to cause your depreciation expense to be doubled or halved? Why?arrow_forwardSee Financial question attached.arrow_forwardanswer quickly, Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm canborrow at 11 percent. Bruce currently has no debt, and its cost of equity is18 percent. The tax rate is 31 percent.Given the above information;a) Complete the table given below for varying levels of debt below by usinga mix of the given information and using your own computations.EBIT $100,000Cost of debt 11%Cost of equity when unlevered 18%Tax rate 31%Debt $0 $10,000 $20,000 $30,000Cost of Equity when leveredEquityD/EVuVLWACCb) Plot the results from the table into the following two graphs:i) Value of the firm vis-à-vis- Total debtii) Cost of capital of the firm vis-à-vis D/E ratio.iii) Which MM propositions have you demonstrated?arrow_forward
- Wilde Software Development has an 11% unlevered cost of equity. Wwilde forecasts the following interest expenses, which are expected to grow at a constant 4% rate after Year 3. Wilde's tax rate is 25%. Year 1 Year 2 Year 3 Interest expenses $75 $110 $130 a. What is the horizon value of the interest tax shield? Do not round intermediate calculations. Round your answer to the nearest cent. b. What is the total value of the interest tax shield at Year 0? Do not round intermediate calculations. Round your answer to the nearest cent. $arrow_forwardMarcus Inc., a manufacturing firm with no debt outstanding and a market value of $100 million is considering borrowing $ 40 million and buying back stock. Assuming that the interest rate on the debt is 9% and that the firm faces a tax rate of 21%, answer the following question: Estimate the present value of all future interest tax savings, assuming that the debt change is permanent. Group of answer choices a. 21m b. 8.4m c. 0.756m d. 1.89marrow_forwardPlease solve the below with detailed explanationarrow_forward
- Wilde Software Development has a 12% unlevered cost of equity. Wilde forecasts the following interest expenses, which are expected to grow at a constant 4% rate after Year 3. Wilde's tax rate is 25 % . Year 1 Year 2 Year 3 Interest expenses $85 $105 $135 What is the horizon value of the interest tax shield? Do not round intermediate calculations. Round your answer to the nearest cent. $ What is the total value of the interest tax shield at Year 0? Do not round intermediate calculations. Round your answer to the nearest cent. $arrow_forwardMarpor Industries has no debt and expects to generate free cash flows of $16.82 million each year. Marpor believes that if it permanently increases its level of debt to $35.60 million, the risk of financial distress may cause it to lose some customers and receive less favourable terms from its suppliers. As a result, Marpor's expected free cash flows with debt will be only $15.32 million per year. Suppose Marpor's tax rate is 25%, the risk-free rate is 6%, the expected return of the market is 12%, and the beta of Marpor's free cash flows is 1.10 (with or without leverage). a. Estimate Marpor's value without leverage. b. Estimate Marpor's value with the new leverage.arrow_forwardThe Nelson Company has $1,485,000 in current assets and $495,000 in current liabilities. Its initial inventory level is $365,000, and it will raise funds as additional notes payable and use them to increase inventory. A. How much can Nelson's short-term debt (notes payable) increase without pushing its current ratio below 2.0? Do not round intermediate calculations. Round your answer to the nearest dollar. B. What will be the firms's quick ratio after Nelson has raised the maximum amount of short-term funds? do not round intermediate calculations. Round your answer to two decimal places.arrow_forward
- Meyer & Co. expects its EBIT to be $115,000 every year forever. The firm can borrow at 7 percent. The company currently has no debt, and its cost of equity is 13 percent. a. If the tax rate is 24 percent, what is the value of the firm? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What will the value be if the company borrows $255,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)arrow_forwardVijayarrow_forwardIn order to finance a new project, a company borrowed $4,000,000 at 8% per year with the stipulation that the company would repay the loan plus all interest at the end of one year. Assume the company’s effective tax rate is 39%. What was the company’s cost of debt capital (a) before taxes, and (b) after taxes? (c) Compare the calculated after-tax cost with the approximated cost using Equation [10.4].arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
The management of receivables Introduction - ACCA Financial Management (FM); Author: OpenTuition;https://www.youtube.com/watch?v=tLmePnbC3ZQ;License: Standard YouTube License, CC-BY