Ruiz Corporation is an unlevered Timber company with assets of $4.50 million. Ruiz reports earnings before...
Ruiz Corporation is an unlevered Timber company with assets of
$4.50 million. Ruiz reports earnings before
interest and tax of $1.50 million. In order to
save on taxes, the CFO has suggested that the firm issue debt and
use the proceeds to retire shares of stock. If conducted, the
capital structure change would result in $2.00
million of new debt with an annual interest expense of
12 percent.
a. How much will Ruiz save in taxes, per year, as a result of the
decision to issue debt? Use a corporate tax rate of
34 percent.
Answer:$ million
Place your answer in millions with at least two decimal places,
that is, if your answer is three quarters of a million dollars you
should answer 0.75.
b.Suppose instead that the debt is permanent, meaning that the same
amount of debt will stay on the books year after year forever.
Under this scenario determine the how much in value the permanent
debt tax shields provide?
Answer:$ million
Place your answer in millions with at least two decimal places,
that is, if your answer is three quarters of a million dollars you
should answer 0.75.
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