ZuoTi.Pro
Question

DBF borrows $9B by issuing 2-year bonds. ECB's cost of debt is 12%, so it will...

DBF borrows $9B by issuing 2-year bonds. ECB's cost of debt is 12%, so it will need to pay interest each year for the next 2 years, and then repay the principal $9B in year 2. ECB's marginal tax rate will remain 35% throughout this period. By how much does the interest tax shield increase the value of DBF?

business   finance   
0 0
Add a comment Improve this question Transcribed image text
Next > < Previous
Sort answers by oldest

Homework Answers

Answer #1

Interest tax shield in Year 1 = Debt * Interest * Tax rate = $ 9 B * 12% * 35% = $ 0.378 B

Interest tax shield in Year 2 = $ 0.378 B

Increase in value of DBF = PV of interest tax shield = 0.378/(1+12%) + 0.378/(1+12%)^2 = $ 638,839.28 M

0 0
Add a comment
Know the answer?
Add Answer to:
DBF borrows $9B by issuing 2-year bonds. ECB's cost of debt is 12%, so it will...
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions

  • 1)DBF borrows $[11]B by issuing [4]-year bonds. ECB's cost of debt is [12]%, so it1 will...

    1)DBF borrows $[11]B by issuing [4]-year bonds. ECB's cost of debt is [12]%, so it1 will need to pay interest each year for the next [2+B] years, and then repay the principal $[11]B in year [4]. ECB's marginal tax rate will remain [37]% throughout this period. By how much does the interest tax shield increase the value of DBF? NOTE: Provide your answers in Millions. E.G. for 100M you must enter 100.0000, for 20M you must enter 20.000, etc. 2)Axon...

  • Simons Industries has just borrowed $1 million by issuing 20-year bonds. The company’s cost of debt...

    Simons Industries has just borrowed $1 million by issuing 20-year bonds. The company’s cost of debt is 5% so it will need to pay $50,000 in interest each year for the next 20 years and then repay the principal of $1 million in year 20. The company’s marginal tax rate is 30%. How much should the interest tax shield increase the value of Simons?

  • Suppose you borrow $1,500 when financing a gym Ivalued at $28,500. Assume that the unlevered cost...

    Suppose you borrow $1,500 when financing a gym Ivalued at $28,500. Assume that the unlevered cost of the gym is 10% and that the cost of debt is valued at 11%. What should be the cost of equity of your firm? Note: Answer in percentage of your answer is 0.405, then answer 4.05 3) DBF borrows IIB by using a year bonds. ECB'S I cost of debt is 9%, so it will need to pay intrest leach year for the...

  • Braxton Enterprises currently has debt outstanding of $20 million and an interest rate of 10%. Braxton...

    Braxton Enterprises currently has debt outstanding of $20 million and an interest rate of 10%. Braxton plans to reduce its debt by repaying $4 million in principal at the end of each year for the next five years. If Braxton's marginal corporate tax rate is 30%, what is the interest tax shield from Braxton's debt in each of the next five years? The interest tax shield in year one is $ million. (Round to three decimal places.)

  • Braxton Enterprises currently has debt outstanding of $30 million and an interest rate of 8%. Braxton...

    Braxton Enterprises currently has debt outstanding of $30 million and an interest rate of 8%. Braxton plans to reduce its debt by repaying $6 million in principal at the end of each year for the next five years. If​ Braxton's marginal corporate tax rate is 30%, what is the interest tax shield from​ Braxton's debt in each of the next five​ years?

  • Braxton Enterprises currently has debt outstanding of $50 million and an interest rate of 7%. Braxton...

    Braxton Enterprises currently has debt outstanding of $50 million and an interest rate of 7%. Braxton plans to reduce its debt by repaying $10 million in principal at the end of each year for the next five years. If Braxton's marginal corporate tax rate is 30%, what is the interest tax shield from Braxton's debt in each of the next five years?

  • Braxton Enterprises currently has debt outstanding of $ 65$65 million and an interest rate of 9...

    Braxton Enterprises currently has debt outstanding of $ 65$65 million and an interest rate of 9 %9%. Braxton plans to reduce its debt by repaying $ 13$13 million in principal at the end of each year for the next five years. If​ Braxton's marginal corporate tax rate is 22 %22%​, what is the interest tax shield from​ Braxton's debt in each of the next five​ years?

  • 5. A firm is issuing new debt to finance a capital investment project. The firm will...

    5. A firm is issuing new debt to finance a capital investment project. The firm will issue 15,550 new bonds with a $1,000 face value that will mature in 10 years. The bonds will pay a $35 semiannual coupon, and similar bonds are currently priced at 95% of par. The associated flotation costs are expected to be $15 per bond. Further, the company has a marginal tax rate of 34%. Given this information, what is the before-tax cost of debt?...

  • A company can borrow $760000 for 7 years by issuing bonds, on which interest is paid...

    A company can borrow $760000 for 7 years by issuing bonds, on which interest is paid semi-annually at j2 = 11% and the principal is paid off using a sinking fund earning j2= 2%. The other option is to borrow $760000 from a bank and repay the loan over 7 years with equal semi-annual payments at j2 = 12%. Which option will result in a smaller periodic cost for the company? Bank loan or Sinking fund method How much will...

  • Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $4...

    Suppose a government has no debt and a balanced budget. Suddenly it decides to spend $4 trillion while raising only $3 trillion worth of taxes.(a) What will be the government’s deficit? _________(b) If the government finances the deficit by issuing bonds, what amount of bonds will it issue? _________(c) At a 4 percent rate of interest, how much interest will the government pay each year? _________(d) Add the interest payment to the government’s $4 trillion expenditures for the next year,...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT