Concept explainers
a)
To determine: The amount earned by debt holders after paying the taxes.
Introduction:
A debt holder is the owner of corporate bond or municipal bond. An investor may buy securities specifically from the issuing element or on the optional market if the first debt-holder chooses to offer before development.
Bondholders are qualified for an arrival of essential when the bond develops and expect for the individual who claim zero-coupon bonds, periodical interest in the form of coupon payments.
b)
To determine: The amount of dividend Firm X needs to cut each year to pay the interest expenses.
Introduction:
A debt holder is the owner of corporate bond or municipal bond. An investor may buy securities specifically from the issuing element or on the optional market if the first debt-holder chooses to offer before development.
Bondholders are qualified for an arrival of essential when the bond develops and, expect for the individual who claim zero-coupon bonds, periodical interest in the form of coupon payments.
c)
To determine: The amount of cut in dividend that will decrease the equity holder’s after-tax income annually.
Introduction:
An equity holder is any individual who has a stake in responsibility for organisation, and an investor is one kind of equity holder. An organisation can offer stock specifically and value when all is said in done as an approach to back ventures or cover working obligation, developments or different expenses.
d)
To determine: The amount received by the government in total tax revenue each year.
Introduction:
A tax income is defined as the income gathered from charges on salary and benefits, government disability commitments, charges exacted on products and ventures, finance charges, assesses on the proprietorship and exchange of property, and different duties.
e)
To determine: The effective tax advantage of debt.
Introduction:
The effective tax rate is the normal tax assessment rate for a
Want to see the full answer?
Check out a sample textbook solutionChapter 15 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
- Suppose a firm has $10 million in debt that it expects to hold in perpetuity. It the interest rate is 7 percent and the corporate tax rate is 35 percent, what is the value of the interest tax shield?arrow_forwardIn this question, you will calculate the value of a levered firm with corporate taxes. Assume that The Best Diagnostics Lab Inc. is subject to 30% federal-plus-state tax rate and its unlevered value is $25 million. If the firm has $15 million in debt, what is its total market value (VL)? 26.3 Million 29.5 Million 52.3 Million None of the abovearrow_forwardAn all equity firm announces that it is going to borrow $11 million in debt and then keep that debt at a constant value relative to the overall value of the company. What would be the appropriate discount rate for the expected interest tax shields generated by this additional debt? A. Required return on debt B. Required return on equity C. Required return on Assets D. WACCarrow_forward
- Your company has a pre-tax cost of debt of 6%. You anticipate the corporate tax rate will go from 21% to 28% in the near future. What impact will the tax change have on your debt cost of capital as an input to your overall cost of capital?arrow_forward4. North Inc has a perpetual expected EBIT of $200. The interest rate on debt is 12%. Assume that there are no taxes. a. what is the value of North Inc if the debt/equity ratio is .25 and its weighted average cost of capital is 16%? What's the value of North's equity? What is the value of North's debt? What is the firm's cost of equity? b. Suppose the corporate tax is 30% and North has $400 in debt outstanding. If the unlevered cost is 20%, what's the value of North? What is the value of the firm's equity? What is the Wacc?arrow_forwardPlease show your work for the following Suppose that your firm's current unlevered value, V*, is $800,000, and its marginal corporate tax rate is 21 percent. Also, you model the firm's PV of financial distress as a function of its debt level according to the relation: PV of financial distress = 800,000 × (D/V*)2. What is the firm's levered value if it issues $200,000 of perpetual debt to buy back stock? Multiple Choice A) $920,000. B) $869,555. C) $792,000. D) $350,000.arrow_forward
- Give typing answer with explanation and conclusion A company has an expected EBIT of $18,000 in perpetuity, a tax rate of 35%, and a debt-to- equity ratio of 0.75. The interest rate on the debt is 9.5%. The firm’s WACC is 9%. a) If the company has not debt, what would be the unlevered cost of capital and firm value? b) Suppose now the company has $55,714.29 in outstanding debt. Using your answer to part a) and M&M Proposition I with taxes, what is the value of this levered firm?arrow_forwardSuppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $1,000 on which it pays interest of 12% each year. Both companies have identical projects that generate free cash flows of $900 or $1,400 each year. After paying any interest on debt, both companies use all remaining free cash flows to pay dividends each year. a. In the table below, fill in the debt payments and equity dividends each firm will receive given each of the two possible levels of free cash flows. b. Suppose you hold 10% of the equity of ABC. What is another portfolio you could hold that would provide the same cash flows? c. Suppose you hold 10% of the equity of XYZ. If you can borrow at 12%, what is an alternative strategy that would provide the same cash flows? a. In the table below, fill in the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows. (Round to the nearest dollar.) АВС XYZ FCF Debt Payments Equity Dividends Debt Payments…arrow_forwardHappy 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 you invest in the corporate debt of Happy Time Inc. today, what is your expected percentage return on this investment? Cash flow in the next year Economy Probability Amount Boom 0.3 Normal 0.4 Recession 0.3 O 36.87% O -26.37% 64.8% O-16.63% $110 million $101 million $61 millionarrow_forward
- Widgets Inc has an expected EBIT of $64,000 in perpetuity and a tax rate of 35 percent. The firm has$95,000 in outstanding debt at an interest rate of 8.5 percent, and its unlevered cost of capital is 15percent. What is the value of the firm according to M&M Proposition I with taxes? Should the companychange its debt–equity ratio if the goal is to maximize the value of the firm? Explain.arrow_forwardYour firm currently has $96 million in debt outstanding with a 8% interest rate. The terms of the loan require the firm to repay $24 million of the balance each year. Suppose that the marginal corporate tax rate is 21%, and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt? The present value of the interest tax shields is $ million. (Round to two decimal places.)arrow_forwardBBA Ltd has just issued $10 million in debt (at par or face value). The firm will pay interest only on this debt. BBA’s marginal tax rate is expected to be 30% for the foreseeable future. a) Suppose BBA pays interest of 6% per year on its debt. What is its annual interest tax shield? b) What is the present value of the interest tax shield, assuming the tax shield’s risk is the same as that of the loan? c) Suppose instead that the interest rate on the debt is 5%. What is the present value of the interest tax shield in this case? Ten years have passed since BBA issued $10 million in perpetual interest-only debt with a 6% annual coupon. Tax rates have remained the same at 30% but interest rates have dropped so BBA’s current cost of debt capital is 4%. d) What is BBA’s annual interest tax shield now? e) What is the present value of the interest tax shield now?arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning