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![Problem 13-12 M&M and Taxes [LO 2]
Tatum can borrow at 6.75 percent. The company currently has no debt and the cost of
equity is 11.15 percent. The current value of the firm is $630,000. The corporate tax rate
is 22 percent. What will the value be if the company borrows $345,000 and uses the
proceeds to repurchase shares? (Do not round intermediate calculations and round
your answer to the nearest whole number, e.g., 32.)
Value of the firm](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fe4b6eabf-fdcd-4e0b-9c46-652cc0cb6449%2F2c4127c4-c419-4154-a087-fc8dd657ef86%2F42j71z_processed.png&w=3840&q=75)
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- Question 3 You own all the equity of R.G.C. I Ltd. The company has no debt. The company’s annual cash flow is GH¢900,000 before interest and taxes. The company tax rate is 35%. You have the option to exchange 1/2 of your equity position for 5% bonds with a face value of GH¢2,000,000. What is the value of the unlevered firm? What is the value of the levered firm? Assuming a bankruptcy cost of GH¢8000, what is the value of the levered firm after considering bankruptcy cost?Question 7 Gioanni Inc., has GH¢1 million in earnings before interest and taxes. Currently it is all-equity-financed. It may issue GH¢3 million in perpetual debt at 15 percent interest in order to repurchase stock, thereby recapitalizing the corporation. There are no personal taxes. If the corporate tax rate is 40 percent, what is the income available to all security holders if the company remains all-equity-financed? If it is recapitalized? What is the present value of the debt tax-shield benefits? The equity capitalization rate for the company’s common stock is 20 percent while it remains all-equity-financed. What is the value of the firm if it remains all-equity financed? What is the firm’s value if it is recapitalized?Question#01 The Rogers Company is currently in this situation: Sales = 14 million; Variable Cost = 7 million Fixed Cost = 3 million tax rate, T = 35%; value of debt, D = $2 million; k d = 10%; ks = 15%; and Shares of stock outstanding, n = 600,000. The firm’s market is stable, and it expects no growth, so all earnings are paid out as dividends. The debt consists of perpetual bonds. What is the total market value of the firm’s stock, S, its price per share, P0, and the firm’s total market value, V? What is the firm’s weighted average cost of capital? The firm can increase its debt by $8 million, to a total of $10 million, using the new debt to buy back and retire some of its shares. Its interest rate on all debt will be 12 percent (it will have to call and refund the old debt), and its cost of equity will rise from 15 to 17 percent. EBIT will remain constant. Should the firm change its capital structure? Calculate the Break-even point of the company.
- Question 5 CCC Corp has $725, 500 of assets and it uses no debt - it is financed only with common equity. The new CFO wants to employ enough debt to raise the total debt to asset ratio to 42 %, using the proceeds from borrowing to buy back common stock at its book value. How much must the firm borrow to achieve the target debt ratio? a. $419,680 b. $ 392, 160 c. $268,320 d. $350, 880 e. $304, 710Question 1 Tireless Wheels Limited has no debt financing and has a value of $60 million and EBIT of $25 million. The firm is planning to change its capital structure by issuing $30 million in debt, and repurchasing requisite number of shares. The firm is estimated to pay 8 percent on interest expense. Its income is taxed at a per annum rate of 30%. a) What is the firm's unlevered cost of equity? b) What is the firm's levered cost of equity? c) What will be the firm's WACC after the recapitalization? d) What change do you observe in the firm's WACC before and after recapitalization? Why?Question 8 Ch. 13. For questions 7, 8, and 9, use the following information: 7.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. What is the aftertax cost of debt? Format as a percentage and round to two places past the decimal point as "X.XX" 5.53 8.) Consider a firm whose debt has a market value of $35 million and whose stock has a market value of $55 million. The firm pays a 7 percent rate of interest on its new debt and has a beta of 1.23. The corporate tax rate is 21%. Assume that the security market line holds, that the risk premium on the market is 10.5 percent, and that the current Treasury bill is rate is 1 percent. Using the pretax cost of debt…
- chapter 9 #4 Assume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if 100 percent debt is used? ____________________ 100 percent common stock? ____________________ (assume that the stockholders will accept 0.08)Question 6 "Axon Industries needs to raise $250,000 USDs for a new investment project. If the firm issues 1-year debt, it may have to pay an interest rate of 15%, although Axon's managers believe that 8.5% would be a fair rate given the level of risk. If the firm issues equity, they believe the equity may be underpriced by 11%.What is the cost (in USDs) to current shareholders of financing the project out of equity? Note: Express your answers in strictly numerical terms. For example, if the answer is $500Question 1 Bloom Company Limited expects its EBIT to be $80,000 every year forever. The firm can borrow at 9 percent. The firm currently has no debt, and its cost of equity is 13 percent. The tax rate is 35 percent. The firm will borrow $100,000 and use the proceeds to repurchase shares. You are required to answer the following: (a) What is the value of the unlevered firm? (b) What will be the value of firm after recapitalization? (c) What is the value of equity in the recapitalized firm? (d) What is the Weighted Cost of Capital of the levered firm?
- Question 21 Kountry Kitchen has a cost of equity of 12.7 percent, a pretax cost of debt of 5.6 percent, and the tax rate is 23 percent. If the company's WACC is 9.22 percent, what is its debt-equity ratio? O 1.41 O .41 O 1.68 .84 .71Question 28: MM and Taxes Solar Industries has a debt-equity ratio of 1.25. Its WACC is 7.8 percent, and its cost of debt is 4.7 percent. The corporate tax rate is 21 percent. What is the company’s cost of equity capital? What is the company’s unlevered cost of equity capital? What would the cost of equity be if the debt-equity ratio were 2? What if it were 1? What if it were zero?Questions 1 Maynard Inc. has no debt outstanding and a total market value of $250,000. EBIT are projected to be $28,000 if the economic condition is normal. If there is a strong expansion in the economy. then EBIT will be 30% higher. If there is a recession, then EBIT will be 50% lower. Maynard is considering a $90,000 debt issue with a 7% interest rate. The proceeds will be used to repurchase shares of stock. There are currently 5,000 shares outstanding. Ignore taxes for this problem. A. Calculate EPS under each of the 3 economic scenarios before any debt is issued. Also calculate the percentage changes in EPS when the economy expands or enter recession. B. Repeat part (a) assuming that the economy goes through with recapitalization. What do you observe? C. Repeat parts a and b in ex. 1 assuming Maynard has a tax rate of 35%.