Kyra Ltd. is finance solely with equity. The company considers to obtain a loan of €1,000,000 from a local bank against an interest rate of 8%.This loan will be repaid in 2 years with equal amounts per year

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 19P

See similar textbooks

Related questions

Q: The financial breakeven point of Soillnc. is P90,000,while the tax rate applicable to the company is…

A: The financial breakeven can be calculated by using this equation EBITFinBE =Interest cost +Preffered…

Q: Cede & Co. expects its EBIT to be $80,000 every year forever. The firm can borrow at 4 percent.…

A: Value of the unlevered firm is calculated as below:Answer: Value is $520000.00

Q: This coming year, Mtshali Ltd is expecting sales revenue of R89 million, operating profit (EBIT) of…

A: Given: Interest = R 2 million Debt rate = 10%

Q: The Karson transport company currently has net operating income of $495,000 and pays interest…

A: Times interest earned ratio = operating income/interest expense

Q: BILDA S. A., a hypothetical company, borrows €1,000,000 at an interest rate of 10 percent per year…

A: Interest Capitalization: Interest capitalization refers to the interest amount that is added to…

Q: Crane Telecommunications Corp. has made an investment in another company that will guarantee it a…

A: The present value is the value of the sum received at time 0 or the current period. It is the value…

Q: Uncle Ben InC. arranged a P9,000,000 revolving credit agreement with a group of banks. The firm paid…

A: Revolving Credit: A line of credit that allows the borrower to borrow funds up to a pre-set limit at…

Q: On December 31, 2021, Oregon Bank recorded an investment of P5,000,000 in a loan granted to a…

A: Given investment value = P5,000,000

Q: The Sandbox's Company has cash needs of P5 million per month. If Sandbox needs more cash, it can…

A: Two types of costs are involved in fund raising in this question: 1. Cost incurred in selling…

Q: On January 1, 2020, Flounder Furniture Ltd. borrowed $3 million (face value) from Aurora Inc., a…

A: Notes are the financial instruments which are quite similar to bond as they have maturity period and…

Q: Reed plc is considering how to improve its debtor collection policy. The following information is…

A: i. Current New Sales £912,000 £872000 (912,000-40000) (-) VC (80%, Since contribution is…

Q: In order to finance a new project, a company borrowed $4,000,000 at 8% per year with the stipulation…

A: a) Calculation of cost of debt before taxes

Q: ICU Window, Inc., is trying to determine its cost of debt. The firm has a debt issue outstanding…

A: Yield to maturity refers to the internal rate of return which is earned by the investor who makes…

Q: Suppose of friend of yours showed you the pro forma income statements for his start up and exclaimed…

A: Income statement or statement of profit & loss records the revenue and expenses of an…

Q: A firm, whose cost of capital is 9 percent, may acquire equipment for $110,783 and rent it to…

A: Net Present Value (NPV) is a capital budgeting technique which uses a discount rate to bring all the…

Q: An international pharmaceutical company is initiating a new project that requires $2.5 million in…

A: Bonds are the debt instruments used by the companies or other institutions for raising funds. The…

Q: Databank holds ¢460million T-Bill but it needs cash to settle an investor whose investment has…

A: Repo rate is the rate at which money is lent to commercial banks, usually by the central bank of the…

Q: Pls help with below homework.

A: Effective annual interest rate(EAR) refers to the real rate of return that we earn on our savings or…

Q: a. What is the current value of the company? (Do not round intermediate calculations and round…

A: Value of Firm: It is the value of creditors' and shareholders' claims altogether. NOTE: As per…

Q: The Barrell Company is approached by a bank that offers to implement a lockbox system of receipts…

A: Lockbox system is one of the system used by banking industry. This is a bank operated mailing…

Q: Antonio Melton, the chief executive officer of Thornton Corporation, has assembled his top advisers…

A: Net Present Value=(Present Value of Cash Inflows-Present Value of Cash Outflows)

Q: Soenen Inc. had the following data for 2012 (in millions). The new CFO believes that the company…

A: Pre-tax income is the earnings that the company generates through sales without considering the…

Q: Mallard plc issues loan capital with a nominal value of £100 million at a price of £90 per £100…

A: Issue price = £90 Par value = £100 Annual interest rate = 10% Annual interest amount = Par…

Q: On January 1, 2020, Flounder Furniture Ltd. borrowed $3 million (face value) from Aurora Inc., a…

A: In finance, the term promissory note represents a written document in which one person promises to…

Q: Manalo Inc. had the following data for 2019 (in millions). The new CFO believes that the company…

A: GIVEN NWC and CCC up to the benchmark companies' level without affecting either sales or the costs…

Q: ccaneer, Inc., has determined that it needs $10 million in cash per week. If Buccaneer needs…

A: Cash and its importance: Cash is the lifeline of a business, and all corporations aim to hold enough…

Q: Buccaneer, Inc., has determined that it needs $10 million in cash per week. If Buccaneer needs…

A: Demand=10000000 Cost per infusion=100 holding cost=0.2/100 =0.002

Q: Sunrise, Incorporated, is trying to determine its cost of debt. The firm has a debt issue…

A: The weighted average capital cost (WACC) consists of the measurement of the capital price of the…

Q: A corporation has decided to use borrowed capital to finance a portion of an equipment purchase. The…

A: Loans are the debt obligations of a company that are shown on the liabilities side. These are paid…

Q: Eagle Sports Products (ESP) is considering issuing debt to raise funds to finance its growth during…

Q: Shiloh Ltd is buying a piece of equipment for GH¢100,000. The company intends to finance the…

A: Under the capital budgeting techniques, the long term investment which is proposed to the management…

Q: Zara Corporation borrowed RM100,000 from their bank for one year. The bank required the company to…

A: Effective rate of interest is the cost of borrowing money from the bank after making all the…

Q: The cash flow plan associated with a debt financing transaction allowed a company to receive…

Q: Jokalet Inc. is running on a P2 million equity and needs Php500,000 additional funds to expand the…

A: Ratio analysis means where different ratio of various years of years companies has been compared and…

Q: The tax rate applicable to Blue Co. is 20%. The firm pays 5% interest on the P350,000 outstanding…

Q: LAGER Ltd, a listed company, has had the following balance sheets from 2016 to 2018 (reported in…

A: Data given: LAGER LTD…

Q: A bank invested $50 million in a two-year asset paying 10 percent interest per year and…

A: Banks take deposits from customers and pay them lower interest rate or take money from investors or…

Q: The financial breakeven point of Soil Inc. is P90,000, while the tax rate applicable to the company…

A: Interest paid = Outstanding loan * Interest rate = 200000*10% = P20000

Q: What is the company's pretax cost of debt? (Do not round intermediate calculations and enter your…

A: Information Provided: Term = 20 years Face value = 100 Price = 108 Coupon rate = 5% (semi-annual…

Q: A start-up company that makes robotic hardware for CIM (computer integrated manufacturing) systems…

A: The computation of interest rate is done below:

Q: Wolfson Corporation has decided to purchase a new machine that costs $3.6 million. The machine will…

A: Company is needed capital to finance its assets. These assets would be considered either through…

Q: The management of ProdPharm.inc has decided to increase the production capacity of its factory by…

A: The real interest rate is the actual rate that an investment earns taking into account the frequency…

Question

Kyra Ltd. is finance solely with equity. The company considers to obtain a loan of €1,000,000 from a local bank against an interest rate of 8%.This loan will be repaid in 2 years with equal amounts per year.The current corporate tax rate is 35%.Calculate based on the Modigliani & Miller’s proposition 1 with taxes what the added value of the company will be after the announcement of the acceptance of the loan.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step 1

VIEW

Step 2

VIEW

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

Mallard plc issues loan capital with a nominal value of £100 million at a price of £90 per £100 nominal value. The annual interest rate is 10 per cent of the nominal capital. The loan capital will be redeemed in two years’ time at £110 per £100 nominal value. The effective rate of corporation tax for the business is 30 per cent. What is the net cost of the loan capital (to the nearest per cent) to the business?
The CFO of Kendrick Enterprises, is evaluating a 10-year, 7.6 percent loan with gross proceeds of $6,400,000. The interest payments on the loan will be made annually. Flotation costs are estimated to be 2.7 percent of gross proceeds and will be amortized using a straight-line schedule over the 10-year life of the loan. The company has a tax rate of 23 percent and the loan will not increase the risk of financial distress for the company. a. Calculate the net present value of the loan excluding flotation costs. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) b. Calculate the net present value of the loan including flotation costs.
Reed plc is considering how to improve its debtor collection policy. The following information is available. Current Credit Sales: £912,000 Average debtor collection period (days): 94 days Wishing to introduce a new policy of payment within (days): 60 days Anticipated reduction in sales per year: £40,000 Increased collection costs per yer: £2,000 Short-term cost of borrowing (%): 30% Sales contribution to profit: 20% Required What will be the net benefit if Reed successfully enforces the new policy? When a corporation raises finance, there are two options: long-term debt finance (bank loan or corporate bonds) and equity finance (ordinary shares). The two approaches have fundamental consequences to the corporation. What are the main differences between the two approaches?
A company expects EBIT of 200000 every year into perpetuity. The firm currently has no debt, but it can borrow at 10% per annum. The company's cost of equity is 25% and the company is subject to a corporate tax rat of 35%. If the company borrows 200,000 and uses the proceeds to repurchase equity, the value of the company would be:
Kelly Corporation is considering the issuance of either debt or preferred stock to finance the purchase of a facility costing P1.5 million. The interest rate on the debt is 16 percent. Preferred stock has a dividend rate of 12 percent. The tax rate is 46 percent. REQUIREMENTS: 1. What is the annual interest payment? 2. What is the annual dividend payment? 3. What is the required income before interest and taxes to satisfy the dividend requirement??
Southern Timber Company expects to earn $10 million in EBIT in the coming year. After that, its EBIT is expected to grow by 4% per year in perpetuity. Southern Timber is currently an unlevered firm with a cost of capital of 6%. The corporate tax rate is 30%. A panel of professional financial experts indicates that the company can enjoy a tax shield benefit of $20 million in firm value if the company changes its capital structure by allowing a certain amount of debt. What would be the value of Southern Timber Company if it decides to undertake the capital structure suggested by these financial experts?
Allen plans to purchase a house in Lindfield this year, the selling price for the house is $3.8 million. Hewants to borrow 80% of the total capital from the bank using a principal and interest loan and pay 30-yearmonthly mortgage payments. CBA bank received his loan application and provided a valuation report basedon current market conditions. However, the bank valuation is conservative, stating the market value is only$3.5 million, and to lower the risk from the bank’s side, it only approves the loan with an LVR (Loan to ValueRatio) of 70% or less.Assuming that Allen wishes to borrow as much as possible from CBA bank, how much will his monthlypayments be for such a mortgage? The current interest rate from CBA is 3.19% P.A. Ignore other costs.
your company has taken a loan for $2,000,000 at 5% annual interest. your company has also issuwd 15 bonds at a face value of $40,000 each which pay 2% annual interest. Also the company has sold 3,000 shares of stock for $400 per share. The company knows shareholder are expecting a return of 15% per year? Assuming you company uses the weighted average cost of capital approach and only pays federal taxes, what is the after tax MARR?
Connor Corp. has an EBIT of $970,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 12 percent, and the corporate tax rate is 21 percent. The company also has a perpetual bond issue outstanding with a market value of $1.91 million. What is the value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g., 1,234,567.)
Suppose that Corporation is to consider a new project that requires $0.8 million finance with the interest rate of 10% and is expected to generate additional cash flow of $120,000 each year. In terms of financing, the firm is to borrow the money from David Lee, the owner of the firm. Assuming the cost of capital for all equity firm is 10%, compute the value of this firm if the corporate tax of 50% is imposed.
Nobleford Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 23 years to maturity that is quoted at 97% of face value. The issue makes semiannual payments and has an embedded cost of 5% annually. Assume the par value of the bond is $1,000. What is the company’s pre-tax cost of debt? If the tax rate is 35%, what is the after-tax cost of debt?
Maddux Corporation has EBIT of $725,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 11 percent and the corporate tax rate is 24 percent. The company also has a perpetual bond issue outstanding with a market value of $1.6 million. What is the value of the company? (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) The CFO of the company informs the company president that the value of the company is $4.9 million. Is the CFO correct?