InterLine Ltd is an electricity distribution company. This means it owns and operates a network of powerlines and other associated infrastructure and fixed assets used to deliver power to homes and businesses. You are assisting the company in undertaking a capital structure review. You have the following information: In the year just passed (year 0), Interline's interest expense was $30 million and this is assumed to remain constant forever. Interline has a debt-to-equity (D/E) ratio of 0.8. Interline's asset beta is 0.45 and its debt beta is 0. The corporate tax rate (and Interline's marginal tax rate) is 28%. Assume all cash flows occur at the year end. Use this information to help answer the questions that follow. (a) Interline's equity beta is? (b) If the risk-free rate is 4%, and Interline's debt is assumed to be riskless, then the total present value of Interline's tax shield is $ 0 million.

InterLine Ltd is an electricity distribution company. This means it owns and operates a network of powerlines and other associated infrastructure and fixed assets used to deliver power to homes and businesses. You are assisting the company in undertaking a capital structure review. You have the following information: In the year just passed (year 0), Interline's interest expense was $30 million and this is assumed to remain constant forever. Interline has a debt-to-equity (D/E) ratio of 0.8. Interline's asset beta is 0.45 and its debt beta is 0. The corporate tax rate (and Interline's marginal tax rate) is 28%. Assume all cash flows occur at the year end. Use this information to help answer the questions that follow. (a) Interline's equity beta is? (b) If the risk-free rate is 4%, and Interline's debt is assumed to be riskless, then the total present value of Interline's tax shield is $ 0 million.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter16: Working Capital Policy And Short-term Financing

Section: Chapter Questions

Problem 5P

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