Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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- PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $20 million, $28 million, or $36 million. Its corporate tax rate is 38%, and investors pay a 30% tax rate on income from equity and a 35% tax rate on interest income. a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year? b. What is the effective tax advantage of debt for interest expenses in excess of $36 million? (Ignore carryforwards). c. What is the expected effective tax advantage of debt for interest expenses between $20 million and $28 million? (Ignore carryforwards). d. What level of interest expense provides PMF with the greatest tax benefit?arrow_forwardVijayarrow_forwardLEX Corporation has $350 million of debt outstanding at an interest rate of 8 percent. What is the dollar value of the tax shield on that debt, just for this year, if LEX is subject to a 35 percent marginal tax rate? (Enter amount in dollars.) Value of tax shield $enter the dollar value of the tax shieldarrow_forward
- Jones Cricket Institute issued a 30-year, 8 percent semi-annual bond 3 year ago. The bond currently sells for 93 percent of its face value. The Company’s tax rate is 35%. a. What is the pre-taxed cost of debt? b. What is the after-tax cost of debt? c. Which is more relevant, the pre-tax or the after- tax cost of debt? Why? In the question above, suppose the book value of the debt issues is $60 million. In addition, the company has a second debt issue on the market, a zero coupon bond with 10 years to mature. The book value of this issue is $35 million and the bond sell for 57 percent of par. a. What is the company’s total book value of debt? b. The total market value? c. What is your best estimate of the after-tax cost of debt now?arrow_forwardViserion, Incorporated, is trying to determine its cost of debt. The firm has a debt issue outstanding with 28 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. What is the company's pretax cost of debt? multiple choice 1 5.57% 6.69% 4.24% 6.13% 5.02% If the tax rate is 24 percent, what is the aftertax cost of debt? multiple choice 2 4.24% 3.81% 4.66% 5.93% 5.57%arrow_forwardSuppose that $100,000 is borrowed at 8 percent and is to be repaid in three equal annual installments. Prepare a debt amortization table and show that the net present value of the after-tax cash flows of the debt is zero using the after-tax cost of debt as the discount rate. The tax rate is 40 percent.arrow_forward
- Answer ASAP please write the formula used please.arrow_forwardAm. 101.arrow_forwardViserion, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding with 16 years to maturity that is quoted at 107 percent of face value. The issue makes semiannual payments and has an embedded cost of 4 percent annually. a. What is the company's pretax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. If the tax rate is 25 percent, what is the aftertax cost of debt? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) а. Pretax cost of debt % b. Aftertax cost of debt %arrow_forward
- Tampa Boat Company pays federal income taxes at a rateof 30 percent on taxable income. Compute the company’sannual after-tax cost of borrowing on a 10 percent, $5 millionarrow_forwardYosemite Corporation has an outstanding debt of $10.09 million on which it pays a 5 percent fixed interest rate annually. Yosemite just made its annual interest payment and has three years remaining until maturity. Yosemite believes that interest rates will fall over the next three years and that floating-rate debt will allow it to reduce its overall borrowing costs. A bank offers Yosemite a three-year interest rate swap with annual payments in which Yosemite will pay LIBOR, currently at 4.8 percent, and receive a 4.3 percent fixed rate on $10.09 million notional principal. Suppose that LIBOR turns out to be 4.2 percent in one year and 3.9 percent in two years. Including interest payments on Yosemite's outstanding debt and payments on the swap, what will be Yosemite's net interest payments for the next three years? Note: Negative values should be indicated by parentheses. Year 1 Year 2 Year 3. Answer is not complete. Net. Interest Payments $ (121,080)arrow_forward
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