Value of levered firm:
= Value of unlevered firm+Debt×Tax rate
= $100+$50×30%
= $115
Hence, correct option is B. $115 million
An un evered firm currently has a value o $100 million. The firm has a tax...
1. An unlevered firm currently has a value of $20 million. The firm has a tax rate of 30%. The firm wishes to replace $10 million of its equity with $10 million of permanent debt. By increasing its leverage, the PV of the expected costs of financial distress would rise from 0 to $3 million. What is the value of the levered firm if it goes ahead with this plan? A) $15 million B) $14 million C) $16 million D)...
Assume capital markets are perfect. Kay Industries currently has $100 million invested in short-term Treasury securities paying 7%, and it pays out the interest payments on these securities each year as a dividend. The board is considering selling the Treasury securities and paying out the proceeds as a one-time dividend payment. a. If the board went ahead with this plan, what would happen to the value of Kay Industries upon the announcement of a change in policy? b. What would...
Pettit Printing Company has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company's EBIT is $10.10 million, and its tax rate is 35%. Pettit can change its capital structure either by increasing its debt to 70% (based on market values) or decreasing it to 30%. If it decides to increase its use of leverage, it must call its old...
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