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Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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KN&J expects its EBIT to be $147,000 every year forever. The company currently has no debt but can borrow at 7.6 percent while its
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- Your firm currently has $108 million in debt outstanding with a 10% interest rate. The terms of the loan require it to repay $27 million of the balance each year. Suppose the marginal corporate tax rate is 21%, and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt? The present value of the interest tax shields is $ ☐ million. (Round to two decimal places.)arrow_forwardCS Cycles is currently financed with 50 percent debt and 50 percent equity. The firm pays $150 each year to its debt investors (at a 12 percent cost of debt), and the debt has no maturity date. What will be the value of the equity if the firm repurchases all of its debt and raises the funds to do this by issuing equity?arrow_forwardStevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $153,000 per year. The cost of equity is 11.1 percent and the tax rate is 34 percent. The firm can borrow perpetual debt at 6.1 percent. Currently, the firm is considering taking on debt equal to 63 percent of its unlevered value. What is the firm's levered value? Multiple Choice $1,007,162 $818,757 $1,104,594 $909,730 $1,189,563arrow_forward
- Tool Manufacturing has an expected EBIT of $81,000 in perpetuity and a tax rate of 24 percent. The firm has $230,000 in outstanding debt at an interest rate of 5.1 percent, and its unlevered cost of capital is 10.9 percent. What is the value of the firm according to M&M Proposition I with taxes? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Value of the firmarrow_forwardSalinas Corporation has a net income of $15 million per year on net sales of $90 million per year. It currently has no long-term debt but is considering a debt issue of $20 million. The interest rate on the debt would be 7%. Salinas currently faces an effective tax rate of 40%. What would be the annual interest tax shield to Salinas if it goes through with the debt issuance?arrow_forwardThe firm is considering increasing its debt by $900,000, using the proceeds to buy back 90,000 shares of stock. what does buy back mean?arrow_forward
- Empire Electric Company (EEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 25% debt and 75% common equity. Its last dividend (D 0) was $2.55, its expected constant growth rate is 3%, and its common stock sells for $ 22. EEC's tax rate is 25%. Two projects are available: Project A has a rate of return of 14%, and Project B's return is 8%. These two projects are equally risky and about as risky as the firm's existing assets. What is its cost of common equity? Do not round intermediate calculations. Round your answer to two decimal places. % What is the WACC? Do not round intermediate calculations. Round your answer to two decimal places.arrow_forwardOrganica Ltd. generates $350,000 cash flow each year. The cost of equity capital is 18% and the company has no debt outstanding. Organica would like to buy back $ 950,000 of its equity by borrowing the same amount at 12% per year. Assume that the debt will continue for an indefinite period and Modigliani and Miller proposition 1 holds, what is the cost of equity capital after the change in capital structure?arrow_forwardA company just issued $453000 of perpetual 5% debt and used the proceeds to repurchase stock. The company expects to generate 107000 of EBIT in perpetuity. The company distributes all its earnings as dividends at the end of each year. The firm's unlevered cost of capital is 14% and the tax rate is 25%. Use APV method to calculate the value of the company with leverage. Your Answer: Answerarrow_forward
- Company A is currently all-equity financed with 100 million shares. The EBIT will be 30 million in year1 and growing at 3% per year forever. The company always has a 40% corporate tax. The investorsdiscount cash flows from similar projects at 18% per year.Now, the company takes a 50-million loan to make distributions to the shareholders. The interest rateon the loan is 5%. There will be no principal repayments made until the loan is paid back in full in year5. Due to financial distress, 30% of Company A’s EBITs will be lost while it carries the 50-million debt.Capital gain tax is zero and dividend tax is 25%.a. If Company A announces that it will use the 50 million to repurchase shares, what will be the priceright after the share repurchase? What is the price right after the announcement?b. If Company A announces that it will use the 50 million to make a one-time dividend payout, what willbe the price right after the dividend payout? What is the price right after the announcement?arrow_forwardMaddux Corporation has an EBIT of $835,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 16 percent and the corporate tax rate is 21 percent. The company also has a perpetual bond issue outstanding with a market value of $2.1 million. What is the value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) Value of the companyarrow_forwardMaddux Corporation has EBIT of $725,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 11 percent and the corporate tax rate is 24 percent. The company also has a perpetual bond issue outstanding with a market value of $1.6 million. What is the value of the company?arrow_forward
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