Preston Ltd is a specialist in manufacturing vehicle engine parts and accessories. It was established in 2008 and has always been financed only by equity. However, it is considering issuing some bonds and moving to the industry average gearing level of 60% debt. If the bond issue goes ahead, then the firm's WACC will be 12%. The required return on the bonds will also be 12%. The corporate tax rate is 35
Preston Ltd is a specialist in manufacturing vehicle engine parts and accessories. It was established in 2008 and has always been financed only by equity. However, it is considering issuing some bonds and moving to the industry average gearing level of 60% debt. If the bond issue goes ahead, then the firm's WACC will be 12%. The required return on the bonds will also be 12%. The corporate tax rate is 35
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Preston Ltd is a specialist in manufacturing vehicle engine parts and accessories. It
was established in 2008 and has always been financed only by equity. However, it is
considering issuing some bonds and moving to the industry average gearing level of
60% debt. If the bond issue goes ahead, then the firm's WACC will be 12%. The
required return on the bonds will also be 12%. The corporate tax rate is 35%.
REQUIRED
a) What will Preston’s
b) Discuss the role and importance of tax shields in the Modigliani & Miller
revised theory of capital structure.
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