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 17, Problem 23P
Redo Problem 22., but assume that Kay must pay a corporate tax rate of 35%, and investors pay no taxes.
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Dollar General (DG) is choosing between financing itself with only equity or with debt and equity. Regardless of how it finances itself, the EBIT for DG will be $545.63 million. If DG does use debt, the interest expense will be $57.85 million. If DG‘s corporate tax rate is 0.30, how much will DG pay (in millions) in total to ALL investors if it uses both debt and equity?
Instruction: Type ONLY your numerical answer in the unit of millions
Assume that a company borrows at a cost of 0.08. Its tax rate is 0.35. What is the minimum after-tax cost of capital for a certain cash flow if
a. 100 percent debt is used?
b. 100 percent common stock?
(assume that the stockholders will accept 0.08)
21. Taxes and the Cost of Capital. Here are book- and market-value balance sheets of the United
Frypan Company (figures in $ millions):
BOOK-VALUE BALANCE SHEET
Net working capital
$ 20
Debt
$ 40
Long-term assets
80
Equity
60
$100
$100
MARKET-VALUE BALANCE SHEET
Net working capital
$ 20
Debt
$ 40
Long-term assets
140
Equity
120
$160
$160
Chapter 17 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
Ch. 17.1 - Prob. 1CCCh. 17.1 - Prob. 2CCCh. 17.2 - Prob. 1CCCh. 17.2 - In a perfect capital market, how important is the...Ch. 17.3 - Prob. 1CCCh. 17.3 - Prob. 2CCCh. 17.4 - Prob. 1CCCh. 17.4 - Prob. 2CCCh. 17.5 - Is there an advantage for a firm to retain its...Ch. 17.5 - Prob. 2CC
Ch. 17.6 - Prob. 1CCCh. 17.6 - Prob. 2CCCh. 17.7 - Prob. 1CCCh. 17.7 - Prob. 2CCCh. 17 - Prob. 1PCh. 17 - ABC Corporation announced that it will pay a...Ch. 17 - Prob. 3PCh. 17 - RFC Corp. has announced a 1 dividend. If RFCs...Ch. 17 - Prob. 5PCh. 17 - KMS Corporation has assets with a market value of...Ch. 17 - Natsam Corporation has 250 million of excess cash....Ch. 17 - Suppose the board of Natsam Corporation decided to...Ch. 17 - Prob. 9PCh. 17 - Suppose BE Press paid dividends at the end of each...Ch. 17 - The HNH Corporation will pay a constant dividend...Ch. 17 - Prob. 12PCh. 17 - Prob. 13PCh. 17 - Prob. 14PCh. 17 - Suppose that all capital gains are taxed at a 25%...Ch. 17 - Prob. 16PCh. 17 - Prob. 17PCh. 17 - Prob. 18PCh. 17 - Prob. 19PCh. 17 - A stock that you know is held by long-term...Ch. 17 - Clovix Corporation has 50 million in cash, 10...Ch. 17 - Assume capital markets are perfect. Kay Industries...Ch. 17 - Redo Problem 22., but assume that Kay must pay a...Ch. 17 - Harris Corporation has 250 million in cash, and...Ch. 17 - Redo Problem 22, but assume the following: a....Ch. 17 - Prob. 26PCh. 17 - Use the data in Table 15.3 to calculate the tax...Ch. 17 - Explain under which conditions an increase in the...Ch. 17 - Why is an announcement of a share repurchase...Ch. 17 - AMC Corporation currently has an enterprise value...Ch. 17 - Prob. 31PCh. 17 - Prob. 32PCh. 17 - Explain why most companies choose to pay stock...Ch. 17 - Prob. 34PCh. 17 - Prob. 35P
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- Explain Why you agree or disagree with the following statement. The answer should not be more than 3 sentences. Be specific in your answer and write only the most relevant explanations MM Proposition I with no tax supports the argument that a firm should borrow money to the point where the tax benefit from debt is equal to the cost of the increased probability of financial distressarrow_forwardIn a Modiqliani and Miller world with corporate taxes, companies A and B are identical except for their capital structure. While A is unlevered, D>0. Let T denote the corporate tax rate. Which of the following statement is False? A. The value of B’s equity is larger than the value of A’s equity B. The total value of B is larger than the total value of A C. The value of B’s debt is larger than the value of A’s debt D. The difference in the total value of the two companies is equal to TDarrow_forwardWhat is the relative tax advantage of corporate debt if the corporate tax rate Tc = 21%, thepersonal tax rate Tp = 37%, but all equity income is received as capital gains and escapestax entirely (TpE = 0%)? How does the relative tax advantage change if the companydecides to pau out all equity income as cash dividends that are taxed at 20%?arrow_forward
- Ch. 16. Which one of the following is not a characteristic of Modigliani-Miller Propositions with corporate taxes? Group of answer choices The cost of equity rises with leverage because the risk to equity rises with leverage There are no taxes Corporations are taxed at the rate TC on earnings after interest There are no transaction or bankruptcy costs individuals and corporations borrow at the same ratearrow_forward15. In comparison to the case when there is only corporate tax, the benefit of debt tends to when there are both corporate and personal taxes. A. remain the same B. be smaller D. be greater for risky firms but smaller for safe firms C. be greaterarrow_forward6. Problem 15-06 (Miller Model with Corporate and Personal Taxes) BA eBook Miller Model with Corporate and Personal Taxes Cruz Corporation has $100 billion of debt outstanding. An otherwise identical firm has no debt and has a market value of $350 billion. Under the Miller model, what is Cruz's value if the federal-plus-state corporate tax rate is 28%, the effective personal tax rate on stock is 17%, and the personal tax rate on debt is 29%? Enter your answer in billions. For example, an answer of $1.23 billion should be entered as 1.23, not 1,230,000,000. Round your answer to two decimal places. $ billionarrow_forward
- If the state tax rate is 20% and the federal tax rate is 30%, what is the total effective tax rate? a. 34% b. 50% c. 44% d. 37% 2. Holding all other variables constant, which of the following would increase return on equity? An increase in _____________. a. the tax rate b. the equity ratio (equity/total assets) c. total assets d. total asset turnoverarrow_forward13. Which of the following is an advantage of a company using equity rather than debt to finance a project? ___________ Dividends do not need to be paid. ___________ Interest is tax deductible, whereas dividends paid are not. ___________ Dividends require less cash than does paying interest on debt. ___________ No taxation occurs, similar to bonds.arrow_forwardMalbar Gold has taken a loan of two million on which it pays an interest of 4.5 %. If the current tax rate 37.5 %. What is the firm's after tax cost of debt? Select one: a. None of these О Б. 3.44 O c. 4.42 O d. 2.81arrow_forward
- Assume zero corporate tax rate. Acorn Industries owns assets that have 80% probability of having market value $50 million in one year and 20% probability of having market value $20 million in one year. The risk free rate is 4% and Acorn's assets have cost of capital 10%. (a) If Acorn is unlevered, what is the value of Acorn's equity? (b) What is the expected return on equity? (c) What is the volatility of the equity return? (d) What is the WACC?arrow_forwardMoving to another question will save this response. Question 1 For a 30% tax bracket, what corporate taxable yield is equivalent to a 7% municipal bond rate? a. 8.6% O b.4.2% O c. 4.9% Od. 10% L Moving to another question will save this response.arrow_forward14. When a firm borrows money to repurchase equity, the firm value no taxes, but the firm value when there is corporate tax. A. increases; decreases C. remains the same; increases when there are B. decreases; increases D. decreases; remains the samearrow_forward
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