Hawar International is a shipping firm with a current share price of $5.05 and 10.4 million shares outstanding. Suppose that Hawar announces plans to lower its corporate taxes by borrowing $9.5million and repurchasing shares, that Hawar pays a corporate tax rate of 21%, and that shareholders expect the change in debt to be permanent.a. If the only imperfection is corporate taxes, what will be the share price after this announcement?b. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $5.10 after this announcement, what is the PV of financial distress costs Hawar willincur as the result of this new debt?

a. To calculate the share price after the announcement, consider the tax benefits of debt.The…

Answered: Hawar International is a shipping firm…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Hw.21. Kaplan & Skadden Inc. is a security investment firm. The firm has identified a company with great potential from India and would like to buy and hold its stock for investment. The stock is currently selling for $30 per share, and Kaplan & Skadden thinks it will climb to $120 per share within three years. Draft a memo analyzing how can the firm ensure that any gain it realizes from this transaction will be taxed as long term capital gain?
8. Use the following information:Debt: $79,000,000 book value outstanding. The debt is trading at 94% of book value. Theyield to maturity is 7%.Equity: 2,900,000 shares selling at $46 per share. Assume the expected rate of return onFederate d’s stock is 16%.Taxes: Federate d’s marginal tax rate is Tc = 0.21.Suppose Federated Junkyards decides to move to a more conservative debt policy. A yearlater, its debt ratio is down to 14.00% (D/V = 0.1400). The interest rate has dropped to6.6%. The company’s business risk, opportunity cost of capital, and tax rate have notchanged. Use the three-step procedure to calculate Federate d’s WACC under these newassumptions.
What is the change in value for a firm with $1 million in equity, $2 million in permanent debt at a 10% interest rate, and a 35% tax rate if MM I is modified to recognize corporate taxes?
The common stock and debt of XYZ Co. are valued $60 million and $40 million respectively. Currently cost of equity of the company is 18% and its cost of debt is 9%. If the company issues an additional $20 million of common stock and uses all of this cash to retire debt, what will be the new required rate of return on company’s equity? Assume change in leverage does not affect risk of debt and there are no taxes.
Ch. 13. For questions 7, 8, and 9, use the following information: 7.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. What is the aftertax cost of debt? Format as a percentage and round to two places past the decimal point as "X.XX" 8.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt from Question 7,…
for question 9 Ch. 13. For questions 7, 8, and 9, use the following information: 7.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. What is the aftertax cost of debt? Format as a percentage and round to two places past the decimal point as "X.XX" 5.53 8.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of…
Consider a firm with an EBITDA of $1,100,000 and an EBIT of $1,000,000. The firm finances its assets with $4,650,000 debt (costing 8.6 percent, all of which is tax deductible) and 216,000 shares of stock selling at $18 per share. To reduce risk associated with this financial leverage, the firm is considering reducing its debt by $2,700,000 by selling additional shares of stock. The firm's tax rate is 21 percent. The change in capital structure will have no effect on the operations of the firm. Thus, EBIT will remain at $1,000,000. Calculate the EPS before and after the change in capital structure and indicate changes in EPS. (Do not round intermediate calculations. Round your answers to 2 decimal places.) EPS before EPS after Changes in debt $ $ $ 2:19 1.80 0:40
Qlink ltd is involved in manufacturing of fast -moving consumer goods.The firm is currently an all -equity firm with 30 million shares outstanding and stock price of Kshs.10 per share.The firm plans to announce that it will borrow Ksshs.400 million and use the funds to repurchase shares. The firm will pay interest only on this debt and has no plans to change its debt holding in future. The prevailing corporate tax rate is 30%.(i)What is the market value of the firm's existing existing assets before the announcement?(ii)What is the market value of the firm's assets(including tax shields) just after the debt is issued but before the shares are repurchased?(iii)What is the firm's share price just before the share repurchase?However many shares will Qlink Ltd repurchased?(iv) What are Qlink Ltd's market value balance sheet and share price after share repurchase?
XYZ borrows $800 million at an interest rate of 7.6%. Prior to this borrowing, it was an all-equity firm. It expects to maintain this debt level indefinitely. XYZ pays taxes at an effective rate of 37%. By how is the market value of XYZ expected to change because of the borrowing? [Hint: Tax shield?]

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