A firm has expected cash flows next year of $1100 and expected interest expense of $250. The corporate tax rate is 20%. Cash flows expected to grow at 2% per year in perpetuity, while tax shields are expected to remain constant. The firm has debt of $4,000 and a D/V ratio of 0.2. The equity beta is 4/3 and the debt beta is 1/3. The risk-free rate is 1% and the market risk premium is 6%. You may assume the risk of the tax shield equals the risk of the firm's debt. The value of the firm using APV is $20,000. True or False?

A firm has expected cash flows next year of $1100 and expected interest expense of $250. The corporate tax rate is 20%. Cash flows expected to grow at 2% per year in perpetuity, while tax shields are expected to remain constant. The firm has debt of $4,000 and a D/V ratio of 0.2. The equity beta is 4/3 and the debt beta is 1/3. The risk-free rate is 1% and the market risk premium is 6%. You may assume the risk of the tax shield equals the risk of the firm's debt. The value of the firm using APV is $20,000. True or False?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter14: Capital Structure Management In Practice

Section: Chapter Questions

Problem 28P

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