Homework Answers
According to MM proposition II , the value of the firm will increase by the debt tax shield when an all equity financed firm is restructured to include debt in the capital structure. This is called Adjusted present value.
Answer is (Debt * Interest rate * Tax rate)/ Interest rate = 1 M * 7% * 21% /7% = $ 210,000
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Assume the tax rate is 21%. State Liquor is an all-equity financing firm. It has restructured...
Tool Manufacturing has an expected EBIT of $51,000 in perpetuity and a tax rate of 21...
Tool Manufacturing has an expected EBIT of $51,000 in perpetuity and a tax rate of 21 percent. The firm has $126,000 in outstanding debt at an interest rate of 5.35 percent, and its unlevered cost of capital is 9.6 percent. What is the value of the firm according to M&M Proposition I with taxes? Should the company change its debt-equity ratio if the goal is to maximize the value of the firm? Explain.
The is the interest rate that a firm pays on any new debt financing. Wat after-tax...
The is the interest rate that a firm pays on any new debt financing. Wat after-tax cost of debt VPC) can borrow funds at an interest rate of 10.20% for a period of five years. Its marginal federal-plus-state tax rate is 25% before-tax cost of debt Pebt is __ (rounded to two decimal places). At the present time, Water and Power Company (WPC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a...
Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it...
Gaucho Services starts
life with all-equity financing and a cost of equity of 14%. Suppose
it refinances to the following market-value capital structure:
Debt (D)
45%
at rD
= 9.4%
Equity (E)
55%
Use MM’s proposition 2 to calculate the new cost of equity. Gaucho
pays taxes at a marginal rate of Tc = 30%.
Calculate Gaucho’s after-tax weighted-average cost of capital.
(Do not round intermediate calculations. Enter your answer
as a percent rounded to 2 decimal places.)
Gaucho Services...
Assume that your firm's marginal tax rate is 35% and that your firm has the following...
Assume that your firm's marginal tax rate is 35% and that your firm has the following capital structure. Your firm does not issue preferred stocks. What is your firm's WACC? Debt Book value of bonds $60 MM Market value of bonds $50 MM Coupon Rate 6.0% Pre-tax cost of debt (e.g., YTM) 7.5% Common Equity Book value of common equity $20 MM Market value of common equity $25 MM Required return (e.g. from the CAPM) 12.6%
Question 111 (25 marks) The Chicago Delivery Inc. is an all equity firm. The company's CFO is for...
Question 111 (25 marks) The Chicago Delivery Inc. is an all equity firm. The company's CFO is forecasting the following economic scenarios for the firm's cash flow before taxes. All cash flows are expected to be level perpetuities Recession 25,000,000 (40%) Normal 50,000,000 (40%) Expansion 100,000,000 (20%) EBIT (Probability) The company's cost of equity capital is calculated to be 10%. The company's CFO is recommending issuing $80,000,000 of debt to repurchase shares outstanding. Corporate tax rate is 40%. Using the...
Wildhorse Resources Company is currently an all-equity firm with a WACC of 17 percent and a...
Wildhorse Resources Company is currently an all-equity firm with a WACC of 17 percent and a 40 percent marginal tax rate. Wildhorse wants to move to a capital structure with $300 million of debt outstanding at an interest rate of 6 percent and a market value of equity equal to $900 million outstanding. Using M&M Proposition 2 with taxes, Equation 16.5, what is the expected return on equity at the new capital structure? (Round answer to 1 decimal place, e.g....
Cullumber Resources Company is currently an all-equity firm with a WACC of 16 percent and a...
Cullumber Resources Company is currently an all-equity firm with a WACC of 16 percent and a 40 percent marginal tax rate. Cullumber wants to move to a capital structure with $460 million of debt outstanding at an interest rate of 6 percent and a market value of equity equal to $1,380 million outstanding. Using M&M Proposition 2 with taxes, Equation 16.5, what is the expected return on equity at the new capital structure? (Round answer to 1 decimal place, e.g....
Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it...
Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it refinances to the following market value capital structure: at rp = 8.9% Debt (D) Equity (E) 44% 56% Use MM's proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of Tc = 40%. Calculate Gaucho's after-tax weighted average cost of capital. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)...
a) (2) Consider two firms: ABC: an all equity firm. It has 9 million common shares...
a) (2) Consider two firms: ABC: an all equity firm. It has 9 million common shares outstanding, worth $40/share. XYZ: is a levered firm with 4.6 million shares at $52.50/share. Its perpetual debt has a market value of $91 million and costs 8% a year. They are identical in every other way. Both firms expect to earn $29 million before interest/year in perpetuity, with each company distributing all earnings as dividends. Neither pay taxes. Assume the debt of XYZ is...
24. Regarding MM 1958 proposition, all of the following is correct EXCEPT a. Shareholders should care...
24. Regarding MM 1958 proposition, all of the following is correct EXCEPT a. Shareholders should care about the firm's debt policy. b. Firm value is unaffected by the firm's capital structure. c. After a change in capital structure, the firm's value should be the same as it was prior to the chance in capital structure. d. The proposition is also called the debt-irrelevance proposition. 29. Regarding MM 1958 proposition, a firm's value is not influenced by a. interest rate paid...
The is the interest rate that a firm pays on any new debt financing. Wat after-tax cost of debt VPC) can borrow funds at an interest rate of 10.20% for a period of five years. Its marginal federal-plus-state tax rate is 25% before-tax cost of debt Pebt is __ (rounded to two decimal places). At the present time, Water and Power Company (WPC) has 15-year noncallable bonds with a face value of $1,000 that are outstanding. These bonds have a...
Gaucho Services starts
life with all-equity financing and a cost of equity of 14%. Suppose
it refinances to the following market-value capital structure:
Debt (D)
45%
at rD
= 9.4%
Equity (E)
55%
Use MM’s proposition 2 to calculate the new cost of equity. Gaucho
pays taxes at a marginal rate of Tc = 30%.
Calculate Gaucho’s after-tax weighted-average cost of capital.
(Do not round intermediate calculations. Enter your answer
as a percent rounded to 2 decimal places.)
Gaucho Services...
Question 111 (25 marks) The Chicago Delivery Inc. is an all equity firm. The company's CFO is forecasting the following economic scenarios for the firm's cash flow before taxes. All cash flows are expected to be level perpetuities Recession 25,000,000 (40%) Normal 50,000,000 (40%) Expansion 100,000,000 (20%) EBIT (Probability) The company's cost of equity capital is calculated to be 10%. The company's CFO is recommending issuing $80,000,000 of debt to repurchase shares outstanding. Corporate tax rate is 40%. Using the...
Gaucho Services starts life with all-equity financing and a cost of equity of 14%. Suppose it refinances to the following market value capital structure: at rp = 8.9% Debt (D) Equity (E) 44% 56% Use MM's proposition 2 to calculate the new cost of equity. Gaucho pays taxes at a marginal rate of Tc = 40%. Calculate Gaucho's after-tax weighted average cost of capital. (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.)...
a) (2) Consider two firms: ABC: an all equity firm. It has 9 million common shares outstanding, worth $40/share. XYZ: is a levered firm with 4.6 million shares at $52.50/share. Its perpetual debt has a market value of $91 million and costs 8% a year. They are identical in every other way. Both firms expect to earn $29 million before interest/year in perpetuity, with each company distributing all earnings as dividends. Neither pay taxes. Assume the debt of XYZ is...
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