Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 15, Problem 14P
Restex maintains a debt-equity ratio of 0.85, and has an equity cost of capital of 12% and a debt cost of capital of 7%. Restex's corporate tax rate is 40%, and its market capitalization is $220 million.
- a. If Restex’s
free cash flow is expected to be $10 million in one year, what constant expected future growth rate is consistent with the firm’s current market value? - b. Estimate the value of Restex’s interest tax shield.
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Restex has a debt-equity ratio of 0.56, an equity cost of capital of 13%, and a debt cost of capital of 9%. Restex's corporate tax rate is 20%, and its market capitalization is $153 million.
a. If Restex's free cash flow is expected to be $4 million one year from now and will grow at a constant rate, what expected future growth rate is consistent with Restex's current
market value?
b. Estimate the value of Restex's interest tax shield.
a. If Restex's free cash flow is expected to be $4 million one year from now and will grow at a constant rate, what expected future growth rate is consistent with Restex's current
market value?
If Restex's free cash flow is expected to be $4 million in one year, the expected future growth rate is % (Round to two decimal places)
b. Estimate the value of Restex's interest tax shield.
Interest tax shield value is $million. (Round to the nearest million.
Happy Time Inc. is expected to generate the following cash flows for the next year, as shown in the table below. Happy Time now only has one outstanding debt with
a face value of $110 million to be repaid in the next year. The current market value for the debt is $67 million. The tax rate is zero. If the firm is financed by common
equity and debt, what is the expected value of common equity next year?
Cash flow in the next year
Probability Amount
Economy
Boom
0.3
$110 million
Normal
0.4
$101 million
Recession 0.3
$61 million
$26.8 million
$24.7 million
$0
-$18.3 million
Milton Industries expects free cash flows of $19 million each year. Milton's corporate tax rate is 22 %, and its unlevered cost of capital is 13%. Milton also has outstanding debt of $73.37 million, and
expects to maintain this level of debt permanently.
a. What is the value of Miton Industries without leverage?
b. What is the value of Milton Industries with leverage?
Cam
a. What is the value of Milton Industries without leverage?
The value of Milton Industries without leverage is 5 million (Round to two decimal places.)
b. What is the value of Milton Industries with leverage?
The value of Milton Industries with leverage is $million. (Round to two decimal places)
Chapter 15 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 15.1 - With corporate income taxes, explain why a firms...Ch. 15.1 - Prob. 2CCCh. 15.2 - With corporate taxes as the only market...Ch. 15.2 - How does leverage affect a firms weighted average...Ch. 15.3 - How can shareholders benefit from a leveraged...Ch. 15.3 - How does the interest tax shield enter into the...Ch. 15.4 - Prob. 1CCCh. 15.4 - How does this personal tax disadvantage of debt...Ch. 15.5 - How does the growth rate of a firm affect the...Ch. 15.5 - Do firms choose capital structures that fully...
Ch. 15 - Prob. 1PCh. 15 - Grommit Engineering expects to have net income...Ch. 15 - Suppose the corporate tax rate is 40%. Consider a...Ch. 15 - Braxton Enterprises currently has debt outstanding...Ch. 15 - Your firm currently has 100 million in debt...Ch. 15 - Arnell Industries has just issued 10 million in...Ch. 15 - Prob. 7PCh. 15 - Prob. 8PCh. 15 - Safeco Inc. has no debt, and maintains a policy of...Ch. 15 - Rogot Instruments makes fine violins and cellos....Ch. 15 - Rumolt Motors has 30 million shares outstanding...Ch. 15 - Summit Builders has a market debt-equity ratio of...Ch. 15 - NatNah, a builder of acoustic accessories, has no...Ch. 15 - Restex maintains a debt-equity ratio of 0.85, and...Ch. 15 - Acme Storage has a market capitalization of 100...Ch. 15 - Milton Industries expects free cash flow of 5...Ch. 15 - Prob. 17PCh. 15 - Kurz Manufacturing is currently an all-equity firm...Ch. 15 - Rally, Inc., is an all-equity firm with assets...Ch. 15 - Prob. 20PCh. 15 - Facebook, Inc. had no debt on its balance sheet in...Ch. 15 - Markum Enterprises is considering permanently...Ch. 15 - Garnet Corporation is considering issuing...Ch. 15 - Suppose the tax rate on interest income is 35%,...Ch. 15 - With its current leverage, Impi Corporation will...Ch. 15 - Colt Systems will have EBIT this coming year of 15...Ch. 15 - PMF, Inc., is equally likely to have EBIT this...
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