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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Chapter 15, Problem 27P
PMF, Inc., is equally likely to have EBIT this coming year of $10 million, $15 million, or $20 million. Its corporate tax rate is 35%, and investors pay a 15% 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 $8 million this coming year?
- b. What is the effective tax advantage of debt for interest expenses in excess of $20 million? (Ignore carryforwards.)
- c. What is the expected effective tax advantage of debt for interest expenses between $10 million and $15 million? (Ignore carryforwards.)
- d. What level of interest expense provides PMF with the greatest tax benefit?
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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?
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?
a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year?
%. (Round to one
If PMF has interest expenses of $16 million this coming year, the effective tax advantage is
decimal place.)
Assume that CVC Corp.'s marginal tax rate is 35%, investors in CVC pay a 15% tax rate on income from equity and a 35% tax rate on interest income. CVC is equally likely to have EBIT this coming year of $20 million, $25 million, or $30 million. What is the effective tax advantage of debt if CVC has interest expenses of $8 million this coming year?
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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