The Lazy Corporation has marginal corporate tax rate of 21%. Assume that investors in Lazy pay a 15% tax rate on income from equity and a 21% tax rate on interest income. Lazy wants to issue risk-free perpetual debt to reduce its corporate tax burden by $1 million per year in each subsequent year. Assume the risk-free rate is 7%. What is the value added to the firm by this debt issuance.

The Lazy Corporation has marginal corporate tax rate of 21%. Assume that investors in Lazy pay a 15% tax rate on income from equity and a 21% tax rate on interest income. Lazy wants to issue risk-free perpetual debt to reduce its corporate tax burden by $1 million per year in each subsequent year. Assume the risk-free rate is 7%. What is the value added to the firm by this debt issuance.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 2P

See similar textbooks

Similar questions

1. Pfd Company has debt with a yield to maturity of 7.8%, a cost of equity of 14.2%, and a cost of preferred stock of 9.1%. The market values of its debt, preferred stock, and equity are $14.5 million, $3.5 million, and $16.3 million, respectively, and its tax rate is 25%. What is this firm's after-tax WACC? Note: Assume that the firm will always be able to utilize its full interest tax shield. Pfd's WACC_____%. (Round to two decimal places.)
Antwerp Co. has a debt-to-equity ratio of 1.4, a corporate tax rate of 30%, pays 4% interest on its debt and has a required rate of return on equity of 12%. What is II’s WACC? How much does the debt tax shield reduce II’s WACC? What is the required rate of return on firm assets?
Laurel, Inc., has debt outstanding with a coupon rate of 5.8% and a yield to maturity of 7.1%. Its tax rate is 35%. What is Laurel's effective (after-tax) cost of debt? NOTE: Assume that the debt has annual coupons and that the firm will always be able to utilize its full interest tax shield. The effective after-tax cost of debt is __ % ? (Round to four decimal places.)
Viserion, Incorporated, is trying to determine its cost of debt. The firm has a debt issue outstanding with 28 years to maturity that is quoted at 106 percent of face value. The issue makes semiannual payments and has an embedded cost of 6 percent annually. What is the company's pretax cost of debt? multiple choice 1 5.57% 6.69% 4.24% 6.13% 5.02% If the tax rate is 24 percent, what is the aftertax cost of debt? multiple choice 2 4.24% 3.81% 4.66% 5.93% 5.57%
Assume that CVC Corp.'s marginal tax rate is 35%, investors in CVC pay a 15% tax rate on income from equity and a 35% tax rate on interest income. CVC is equally likely to have EBIT this coming year of $20 million, $25 million, or $30 million. What is the effective tax advantage of debt if CVC has interest expenses of $8 million this coming year?
Laurel, Inc., has debt outstanding with a coupon rate of 5.8%and a yield to maturity of 7.1%.Its tax rate is 38%.What is Laurel's effective (after-tax) cost of debt? NOTE: Assume that the debt has annual coupons. Note: Assume that the firm will always be able to utilize its full interest tax shield.
What is the change in value for a firm with $1 million in equity, $2 million in permanent debt at a 10% interest rate, and a 35% tax rate if MM I is modified to recognize corporate taxes?
Pack-and-Send, Inc. expects to have free cash flow of $6.5 million next year and this cash flow will grow at a rate of 6% per year thereafter. The firm's equity cost of capital is 9% and its debt cost of capital is 5%. Assume that Pack-and-Send has a corporate tax rate of 30%. If the firm maintains a debt-to-equity ratio of 0.60, the value of the firm's tax shield is closest to: options: $18.47 million $27.95 million $54.28 million $260.00 million None of the above
4. Assume the marginal corporate tax rate is 21 percent. The firm has no debt in its capital structure. It is valued at $100 million. What would be the value of the firm if it issued $50 million in perpetual debt and repurchased the same amount of equity?
What is the amount of the annual interest tax shield for a firm with £3 million in debt that pays 12% interest if the firm is in the 21% tax bracket? a. £75,600 b. £234,000 c. £157,500 d. £260,000