a)
To determine: The annual interest tax shield.
Introduction:
An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.
b)
To determine: The present value of interest tax shield at rate of 4%.
Introduction:
An interest tax shield is a deduction in taxable income for a corporation or an individual achieved through claiming deduction like depreciation, charitable donations and, mortgage interest. Tax shield lowers the overall cost of taxes owned by the individual taxpayer.
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Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
- Cede & Co. expects its EBIT to be $83,000 every year forever. The firm can borrow at 11 percent. The firm currently has no debt, and its cost of equity is 15 percent. a. If the tax rate is 25 percent, what is the value of the firm? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. What will the value be if the company borrows $144,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)arrow_forwardIf a firm borrows $50 million for one year at an interest rate of 9 percent, what is the present value of the interest tax shield? Assume a 21 percent marginal corporate tax rate.arrow_forwardThe Bellwood Company is financed entirely with equity. The company is considering a loan of $4.5 million. The loan will be repaid in equal principal installments over the next two years and has an interest rate of 7 percent. The company's tax rate is 24 percent. According to MM Proposition I with taxes, what would be the increase in the value of the company after the loan? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89.) Increase in the valuearrow_forward
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- Cede & Co. expects its EBIT to be $163000 every year forever. The company can borrow at 8 percent. The company currently has no debt and its cost of equity is 10 percent. The tax rate is 23 percent. If the company borrows $185,000 and uses the proceeds to buy back equity, what is the weighted average cost of capital after the recapitalisation is complete? O 15.13% O 9.67% O 14.32% O 8.17%arrow_forwardassume that the average duration of first national bank's assets is four years, while the average duration of its liabilities is three years. Assuming that its assets equal its liabilities, then a 5 percentage point increase in interest rates will cause the net worth of first national to increase by ___% (put a negative sign if it is a decrease) of the total original asset value.arrow_forwardCede & Co. expects its EBIT to be $80,000 every year forever. The firm can borrow at 4 percent. The firm currently has no debt, and its cost of equity is 10 percent. If the tax rate is 35 percent, what is the value of the firm? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Value of the firm $ What will the value be if the company borrows $122,000 and uses the proceeds to repurchase shares? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) Value of the firm $arrow_forward
- The XYZ Co. needs an estimate of the present value of its future revenues to get a bank loan. Management expects XYZ Co, to post revenues of $250m in 4 years, $300m in 5 years, $360m in 6 years and $400m in 7 years. If the appropriate discount rate is 4% per year, what is the present value of XYZ Co.’s revenues?arrow_forward(Ignore income taxes in this problem.) Your Company is considering an investment proposal in which a working capital investment of $45,000 would be required. The investment would provide cash inflows of $5,000 per year for seven years. The company's discount rate is 8%. What is the investment's net present value? a- $4,115 b- $3,530 c- $7,265 d- $5,645arrow_forwardFourteen years ago, the Archer Corporation borrowed $7050,000. Since then, cumulative inflation has been 51 percent (a compound rate of approximately 3 percent per year). a. When the firm repays the original $7,050,000 loan this year, what will be the effective purchasing power of the $7,050,000? (Hint Divide the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Effective purchasing power b. To maintain the original $7,050.000 purchasing power, how much should the lender be repaid? (Hint: Multiply the loan amount by one plus cumulative inflation.) (Do not round intermediate calculations and round your answer to the nearest whole dollar.) Loan repaymentarrow_forward