capital of 10%, a cost of debt is 6%, and a debt to value ratio (D/V ) of 50%. Techcrunch’s current EBIT is $100 million. Assume that the company is not expected to grow and pays out all of its earnings. Assume that capital expenditures are equal to depreciation and that there are no changes in net working capital. Before the Tax Cuts and Jobs

capital of 10%, a cost of debt is 6%, and a debt to value ratio (D/V ) of 50%. Techcrunch’s current EBIT is $100 million. Assume that the company is not expected to grow and pays out all of its earnings. Assume that capital expenditures are equal to depreciation and that there are no changes in net working capital. Before the Tax Cuts and Jobs

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter3: Evaluation Of Financial Performance

Section: Chapter Questions

Problem 7P

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Techcrunch has an equity cost of capital of 10%, a cost of debt is 6%, and a debt to value ratio (D/V ) of 50%. Techcrunch’s current EBIT is $100 million. Assume that the company is not expected to grow and pays out all of its earnings. Assume that capital expenditures are equal to depreciation and that there are no changes in net working capital. Before the Tax Cuts and Jobs Act of 2017, Techcrunch’s corporate tax rate was 35%. After the tax reform, Techcrunch’s tax rate is reduced to 21%. What is the firm value of Techcrunch after the tax reform? How much does the value of equity increases due to the reform?
Soenen Inc. had the following data for 2012 (in millions). The new CFO believes that the company could improve its working capital management sufficiently to bring its net working capital and cash conversion cycle up to the benchmark companies' level without affecting either sales or the costs of goods sold. Soenen finances its net working capital with a bank loan at an 8% annual interest rate, and it uses a 365-day year. If these changes had been made, by how much would the firm's pre-tax income have increased? Original Data Related CCC Benchmarks' CCC Sales $108,000 Cost of goods sold $80,000 Inventory (ICP) $20,000 91.25 38.00 Receivables (DSO) $16,000 54.07 20.00 Payables (PDP) $5,000 22.81 30.00 122.51 28.00
Google Corporation has no debt on its balance sheet in 2008, but paid $1.6 billion in taxes. Assume that Google's marginal tax rate is 35% and Google's borrowing cost is 7%. Assume that investors in Google pay a 15% tax rate on income from equity and a 35% tax rate on interest income. If Google were to issue sufficient debt to reduce its corporate taxes by $1 billion per year permanently, then the value that would be created is closest to?
In year 1, AMC will earn $2,900 before interest and taxes. The market expects these earnings to grow at a rate of 2.7% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 45%. Right now, the firm has $7,250 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 2.7% per year. Suppose the risk-free rate equals 4.5%, and the expected return on the market equals 9.9%. The asset beta for this industry is 1.93. Using the WACC, the expected return for AMC equity is 25.71%. Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow using the FTE method? (Hold all intermediate calculations to at least 6 decimal places and round to the…
In year 1, AMC will earn $2,900 before interest and taxes. The market expects these earnings to grow at a rate of 2.7% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 45%. Right now, the firm has $7,250 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 2.7% per year. Suppose the risk-free rate equals 4.5%, and the expected return on the market equals 9.9%. The asset beta for this industry is 1.93. a. If AMC were an all-equity (unlevered) firm, what would its market value be? (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.) b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC's debt is expected to grow by 2.7% per year, at what rate are its interest payments expected…
The Federal corporate tax rate currently is 21%. If a company with anenterprise value of $3billion has $1billion of debt paying 6%, and plans to have this debt forever, and if the tax rate is increased to 26%, according to Miller & Modigliani, how does this change impact the enterprise value of this company? Provide a % change.
Jim's Espresso expects sales to grow by 10.4% next year. Assume that Jim's pays out 85.9% of its net income. Use the following statements LOADING... and the percent of sales method to forecast: a. Stockholders' equity b. Accounts payable The Tax Cuts and Jobs Act of 2017 temporarily allows 100% bonus depreciation (effectively expensing capital expenditures). However, we will still include depreciation forecasting in this chapter and in these problems in anticipation of the return of standard depreciation practices during your career. Income Statement Sales $205,430Costs Except Depreciation (99,920)EBITDA $105,510Depreciation (6,070)EBIT $99,440Interest Expense (net) (570)Pretax Income $98,870Income Tax (34,605)Net Income $64,265 Balance Sheet Assets Cash and Equivalents $14,920Accounts Receivable 2,010Inventories 3,950Total Current Assets $20,880Property, Plant and Equipment 10,070Total Assets $30,950 Liabilities…
Tool Manufacturing has an expected EBIT of $74,000 in perpetuity and a tax rate of 21 percent. The company has $131,500 in outstanding debt at an interest rate of 6.8 percent and its unlevered cost of capital is 13 percent. What is the value of the company according MM Proposition I with taxes? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Company value
Google Corporation has no debt on its balance sheet in 2008, but paid $1.6 billion in taxes. Assume that Google's marginal tax rate is 35% and Google's borrowing cost is 5%. Assume that investors hold Google stock in retirement accounts that are free from personal taxes. If Google were to issue sufficient debt to reduce its taxes by $3 billion per year permanently, then the value that would be created is closest to ($ billion) (2 decimal places):
Edsel Research Labs has $28.20 million in assets. Currently half of these assets are financed with long-term debt at 5 percent and half with common stock having a par value of $10. Ms. Edsel, the Vice President of Finance, wishes to analyze two refinancing plans, one with more debt (D) and one with more equity (E). The company earns a return on assets before interest and taxes of 5 percent. The tax rate is 30 percent. Under Plan D, a $7.05 million long-term bond would be sold at an interest rate of 7 percent and 705,000 shares of stock would be purchased in the market at $10 per share and retired. Under Plan E, 705,000 shares of stock would be sold at $10 per share and the $7,050,000 in proceeds would be used to reduce long-term debt. a-1. How would each of these plans affect earnings per share? Consider the current plan and the two new plans. (Round your answers to 2 decimal places.) Earnings per Share Current Plan D Plan E a-2. Which…
ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 9 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 6.6 percent annually. What is the company's pretax cost of debt? If the tax rate is 24 percent, what is the aftertax cost of debt? Pretax cost of debt: __________% Aftertax cost of debt: __________%
Spot Company’s balance sheet consists of the following: $790 million and $230 million. Its current after-tax cost of debt is 4% and its cost of equity is 8%. You have been analyzing various market factors and have estimated that the market value of its debt is currently $760 million and the market value of the equity is $690 million. Furthermore, you believe that given current market conditions and the existence of flotation costs, the marginal after-tax cost of debt would be 70 basis points higher than the existing after-tax cost of debt and the marginal cost of equity would be 130 basis points higher. What is the difference in the company's Weighted Average Cost of Capital (WACC) based on the market-based data and the book-value data? Subtract the book value WACC from the market value WACC and present your answer in percentage terms, rounded to decimal places (e.g., 1.23%].Round your answer to 2 decimal places. Please show all work including how to set up in excel. Note:- Do not…