15-8. (Computing interest tax savings) Presently, H. Swank, Inc., does not use any finan-cial leverage and has total financing equal to $1 million. It is considering refinancingand issuing $500,000 of debt that pays 5 percent interest and using that money to buyback half the firm's common stock. Assume that the debt has a 30-year maturity andthat Swank will have no principal payments for 30 years. Swank currently pays all ofits net income to common shareholders in the form of cash dividends and intends tocontinue to do this in the future. The corporate tax rate on the firm's earnings is 35percent. Swank's current income statement (before the debt issue) is as follows:$100,000Net operating income (EBIT)Interest expenseEarnings before taxesIncome taxes$100,000(35,000)$ 65,000Net incomea. If Swank issues the debt and uses it to buy back common stock, how much moneycan the firm distribute to its stockholders and bondholders next year if the firm'sEBIT remains equal to $100,000?b. What are Swank's interest tax savings from the issuance of the debt?c. Are Swank's stockholders better off after the debt issue? Why or why not?

Debts- Debt is something, generally money, on loan by one party from another. Debt is used by…

Answered: 15–8. (Computing interest tax savings)…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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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.
Am. 112.
ANSWER
criticism. structure? Explain M-M Theory with their 5 The Holland Company expects perpetual earnings before interest and taxes (EBIT) of $4 6 million per year. The firm's after-tax, all-equity discount rate (ro) is 15%. Holland is subject to a corporate tax rate of 35%. The pretax cost of the firm's debt capital is 10% per annum, and the firm has $10 million of debt in its capital structure. i. ii. iii. Question: 7 What is Holland's value? What is Holland's cost of equity (rs)? What is Holland's weighted average cost of capital (Twacc)?
D4)
Ef 45.
Meyer & Co. expects its EBIT to be $78,000 every year forever. The firm can borrow at 7 percent. Meyer currently has no debt, and its cost of equity is 12 percent. If the tax rate is 35 percent, what is the value of the firm? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Value of the firm $ 650,000.00|8 What will the value be if the company borrows $103,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.) Value of the firm $ 720,887.25
Safeco Inc. has no debt, and maintains a policy of holding $12 million in excess cash reserves, invested in risk-free Treasury securities. If Safeco pays a corporate tax rate of 21%, what is the cost of permanently maintaining this $12 million reserve? (Hint: What is the present value of the additional taxes that Safeco will pay?)
answer quickly, Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm canborrow at 11 percent. Bruce currently has no debt, and its cost of equity is18 percent. The tax rate is 31 percent.Given the above information;a) Complete the table given below for varying levels of debt below by usinga mix of the given information and using your own computations.EBIT $100,000Cost of debt 11%Cost of equity when unlevered 18%Tax rate 31%Debt $0 $10,000 $20,000 $30,000Cost of Equity when leveredEquityD/EVuVLWACCb) Plot the results from the table into the following two graphs:i) Value of the firm vis-à-vis- Total debtii) Cost of capital of the firm vis-à-vis D/E ratio.iii) Which MM propositions have you demonstrated?
Nielson Motors (NM) has no debt. Its assets will be worth $600 million in one year if the economy is strong, but only $300 million if the economy is weak. Both events are equally likely. The market value today of Nielson's assets is $400 million. Suppose the risk-free interest rate is 3%. If Nielson borrows $157 million today at this rate and uses the proceeds to pay an immediate cash dividend, then according to MM, the expected return of Nielson's stock just after the dividend is paid would be closest to (%) (2 decimal places):
7.
Please answer the following showing detailed working: Bruce & Co. expects its EBIT to be $100,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax rate is 31 percent. Given the above information; a) Complete the table given below for varying levels of debt below by using a mix of the given information and using your own computations. EBIT $100,000.00 Cost of debts 11% cost of equity when unlevered 18% Tax rate 31% Debts $0 $10,000.00 $20,000.00 $30,000.00 Cost of Equity when levered Equity D/E Vu VL WACC b) Plot the results from the table into the following two graphs:i) Value of the firm vis-à-vis- Total debtii) Cost of capital of the firm vis-à-vis D/E ratio.iii) Which MM propositions have you demonstrated?

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