) Rendezvous Ltd. 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. Bruce will borrow $61,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?b) Provide at least two circumstances, where interest tax-shield will have no value for a company.c) Your firm has a debt-equity ratio of 0.60. Your cost of equity is 11 percent and your after-tax cost of debt is 7 percent. What will your cost of equity be if the target capital structure becomes a 50/50 mix of debt and equity

Consider the following case of Happy Turtle Transportation Company: Suppose Happy Turtle Transportation Company is considering a project that will require $350,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. • Common equity outstanding will be 10,000 shares. • The company incurs a tax rate of 25%.   If the project is financed using 100% equity capital, then Happy Turtle Transportation Company’s return on equity (ROE) on the project will be    . In addition, Happy Turtle’s earnings per share (EPS) will be    .   Alternatively, Happy Turtle Transportation Company’s CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company’s debt will be 10%. Because the company will finance only 50% of the project with equity, it will have only 5,000 shares…

Hemingway Corporation is considering expanding its operations to boost its income, but before making a final decision, it has asked you to calculate the corporate tax consequences of such a decision. Currently, Hemingway generates before-tax yearly income of $203,000 and has no debt outstanding. Expanding operations would allow Hemingway to increase before-tax yearly income to $347,000. Hemingway can use either cash reserves or debt to finance its expansion. If Hemingway uses debt, it will have a yearly interest expense of $69,000. Create a spreadsheet to conduct a tax analysis (assume a 21% flat tax rate) for Hemingway Corporation and determine the folowing: a. What is Hemingway's current annual corporate tax liability? b. If Hemingway finances its expansion using cash reserves, what will be its new corporate tax liability? c. If Hemingway finances its expansion using debt, what will be its new corporate tax liability? a. Hemingway's current annual corporate tax liability is $ (Round…

Consider the following case of Happy Turtle Transportation Company: Suppose Happy Turtle Transportation Company is considering a project that will require $400,000 in assets. • The company is small, so it is exempt from the interest deduction limitation under the new tax law. • The project is expected to produce earnings before interest and taxes (EBIT) of $40,000. Common equity outstanding will be 20,000 shares. • The company incurs a tax rate of 25%. If the project is financed using 100 % equity capital, then Happy Turtle Transportation Company's return on equity (ROE) on the project will be In addition, Happy Turtle's earnings per share (EPS) will be Alternatively, Happy Turtle Transportation Company's CFO is also considering financing the project with 50% debt and 50% equity capital. The interest rate on the company's debt will be 12%. Because the company will finance only 50% of the project with equity, it will have only 10,000 shares outstanding. Happy Turtle Transportation…

The Barrell Company is approached by a bank that offers to implement a lockbox system of receipts for the firm. If the new system is implemented, it will reduce float by 6 days per year. If Barrell's cost of capital is 11.5% and its annual sales are expected to be P10,00,000, then what is the maximum amount that Barrell is willing to pay for the lockbox system? O P164,438.56 O P18,904.11 O P1,150,000.00 O P1,890.41

Blazer Inc. is thinking of acquiring Laker Company. Blazer expects Laker's NOPAT to be $9 million the first year, with no net investment in operating capital and no interest expense. For the second year, Laker is expected to have NOPAT of $25 million and interest expense of $5 million. Also, in the second year only, Laker will need $10 million of net new investment in operating capital. Laker's marginal tax rate is 40%. After the second year, the free cash flows and tax shields will grow at a constant rate of 4%. Blazer has determined that Laker's cost of equity is 17.5%, and Laker currently has no debt outstanding. Assume all cash flows occur at the end of the year. Blazer must pay $45 million to acquire Laker. What is the NPV of the proposed acquisition?

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You are evaluating a project that will require an investment of $18 million that will be depreciated over a period of 18 years. You are concerned that the corporate tax rate will increase during the life of the project. a. Would this increase the accounting break-even point? b. Would it increase the NPV break-even point? a. Would this increase the accounting break-even point? b. Would it increase the NPV break-even point?

Assume zero taxes. The Black Gold Oil Company can lease equipment at $10,000 per year (first payment 1 year hence) for 10 years or purchased at a cost of $64,177. The company has a weighted average cost of capital of 15 percent. A bank has indicated that it would be willing to make the loan of $64,177 at a cost of 10 percent. Questions: 1. Should the company buy or lease? There are no uncertainties. The equipment will be used for 10 years. There is zero salvage value. 2. If the bank was willing to lend funds at 9 percent, should the company buy or lease? 3. If the company pays $64,177 for the equipment, it will save $10,000 a year lease payments for 10 years. 4. Comparing "Buy" versus "Lease", what internal rate of return will it earn on its "investment"? 5. Now assume a marginal tax rate of 0.4. Assume that the funds can be obtained for 0.10 at a bank. The company uses sum-of-the-years' digits depreciation for taxes. Should the firm buy or lease? (Assume that the present value of the…

FrontLier Company is planning to acquire Stint Corp. The additional pre-tax income from the acquisition will be $150,000 in the first year, but it will increase by 5% in future years. Because of diversification, the beta of FronLier will decrease from 1.20 to 0.9. Currently the return on the market is 11% and the riskless rate is 6%. What is the maximum price that FrontLier should pay for Stint Corp? The tax rate of FrontLier is 30%. O 1,870,000 1,872,500 1,875,000 O 1,909,091