a)
To determine: The definition of MM proposition 1 without taxes and with corporate taxes.
a)
Explanation of Solution
The relationship between leverage and firm value is specified in MM Proposition I. Proposition I without taxes is
b)
To determine: The definition of MM proposition II without taxes and with corporate taxes.
b)
Explanation of Solution
The connection between leverage and equity costs is stated in MM Proposition II. Sans taxes, Proposition II is
c)
To determine: The definition of miller model.
c)
Explanation of Solution
The MM method brings in individual taxes. The impact of individual taxes is, in essence, to decrease the benefit of financing corporate debt.
d)
To determine: The definition of adjusted present value (APV) model.
d)
Explanation of Solution
The balanced present-value demonstrates rebates anticipated free cash streams and interest-tax shields at the unlevered value taken a toll to reach an operational esteem. To induce the esteem of the complete company (both obligation and value) you add within the esteem of non-operating resources. Subtract the esteem of the obligation to urge the value esteem. This show is especially accommodating when the acquirer alters the capital structure of the company after the exchange since it values the intrigued charge shields and the firm's unlevered esteem separately.
e)
To determine: The definition of value of debt tax shield.
e)
Explanation of Solution
The value of the shield of debt tax is the present value of the interest payments tax savings. In the tax model MM. this is just
f)
To determine: The definition of equity as an option.
f)
Explanation of Solution
In the event that a company has an extraordinary obligation, it can select to default in case the company isn't worth more than the obligation standard value. This choice to renege in the event that the firm's value is little is comparative to the choice not to work out a call option when the stock cost is low. If the administration (and so the stockholders) make the obligation installment, they will be able to keep the business. It permits value like a choice on the total firm's basic value, with a strike cost comparable to the debt's standard value. If D is the par value of the debt growing in one year and S is the value of the whole business then the payout to the stockholder when the debt matures is:
Want to see more full solutions like this?
Chapter 17 Solutions
Intermediate Financial Management (MindTap Course List)
- Why does issuing debt result in an income tax advantage when compared to issuing equity?arrow_forwardFor an individual investor, investment in which one of the following accounts has the best liquidity? a. Group of answer choices b. regular taxable investment account c. 401 (k) d. IRA e. Roth IRAarrow_forwardWhy do we use an after-tax figure for the cost of debt but not for the cost of equity? Explain yourreasoning and show your workings.arrow_forward
- One should determine the after-tax weighted average cost of capital by Multiple Choice A) dividing the weighted average before-tax cost of debt to the weighted average cost of equity. B) adding the weighted average before-tax cost of debt to the weighted average cost of equity. C) adding the weighted average after-tax cost of debt to the weighted average cost of equity. D) multiplying the weighted average after-tax cost of debt by the weighted average cost of equity.arrow_forward4. Explain or illustrate before-tax cost of debt and after-tax cost of debt. 5. What are the relationships between: a) interest rate and cost of debt; b) default risk and cost of debt; and c) bond rates and interest rates?arrow_forwardplease give a step by step calculations of before-tax cost of debt?arrow_forward
- 4. Explain or illustrate before-tax cost of debt and after-tax cost of debt. 5. What are the relationships between: a) interest rate and cost of debt; b) default risk and cost of debt; and c) bond rates and interest rates? 6. What is the difference between yield to maturity on outstanding debt and coupon rate? Which is a better measure of cost of debt between the two? 7. How is COST OF preferred equity computed?arrow_forwardWhat will be the Effect of Interest Rates on the After Tax IRR on Equity?arrow_forwardThe discount rate used in a net present value analysis is the ________. A. rate of interest earned on a savings account B. rate of inflation C. rate of interest charged for debt financing of an investment D. required rate of return or the hurdle ratearrow_forward
- Define the term After-tax cost of debt?arrow_forwardOutline the main conclusions regarding the choice between debt and equity of both M&M( tax) and Trade-off theory.Explain why these two theories come to different conclusions.arrow_forwardWhich of the following may affect yields (interest rates) on debt securities? default risk premium liquidity premium tax adjustment default risk premium AND liquidity premium default risk premium AND liquidity premium AND tax adjustmentarrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning