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 16P
Milton Industries expects
- a. What is the value of Milton Industries without leverage?
- b. What is the value of Milton Industries with leverage?
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Milton Industries expects free cash flows of $4 million each year. Milton's corporate tax rate is 30%, and its unlevered cost of capital is 12%. Milton also has outstanding debt of $24.27 million, and it
expects to maintain this level of debt permanently.
a. What is the value of Milton Industries without leverage?
b. What is the value of Milton Industries with leverage?
a. What is the value of Milton Industries without leverage?
The value of Milton Industries without leverage is $ 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.)
Milton Industries expects free cash flow of $12 million each year. The corporate tax rate is 22 %, and its unlevered cost of
equity is 12%. The firm also has outstanding debt of $40 million and it expects to maintain this amount permanently.
What is the value of Milton Industries with leverage? a) 85, 973,333 b) 88, 573, 333 c) 89,646, 444 d) 90, 125, 564 What is
the value of equity of Milton Industries with leverage? a) 76, 573, 333 b) 73,973,333 c) 77,646,444 d) 78, 125, 564
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
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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- a firm has an asset base with a market value of 5.3 million. ITs debt is worth 2.5 million. if 0.2 million is paid in interest annually and the shareholders expect a 16% annual return, what is the weighted average cost of capital assuming no corporate taxes? what is the WACC if corporate taxes are 45%?arrow_forwardGrommit Engineering expects to have net income next year of $24.36 million and free cash flow of $22.17 million. Grommit's marginal corporate tax rate is 35%. a. If Grommit increases leverage so that its interest expense rises by $6.7 million, how will net income change? b. For the same increase in interest expense, how will free cash flow change? a. If Grommit increases leverage so that its interest expense rises by $6.7 million, how will net income change? Net income will fall to $ 4.36 million. (Round to two decimal places.) b. For the same increase in interest expense, how will free cash flow change? (Select the best choice below.) A. Free cash flow increases by the amount of the interest expense. B. Free cash flow decreases by the amount of the interest expense. C. Free cash flow is not affected by interest expense. D. None of the above.arrow_forwardArnell Industries has 5.5 million in permanent debt outstanding. The firm will pay interest only on this debt. Arnell's marginal tax rate is expected to be 40% for the foreseeable future. a. Suppose Arnell pays interest of 9% per year on its debt. What is its annual interest tax shield? b. What is the present value of the interest tax shield, assuming its risk is the same as the loan? c. Suppose instead the interest rate on the debt were 7%. What is the present value of the interest tax shield in this case?arrow_forward
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