Explain in a few sentences what each example means. This is strictly qualitative. 238F2Wed3Pretax versus After-Tax Free Cash FlowsWill the same valuation arise if the analyst discounts pretax-free cash flows at a pretax costof capital and after-tax free cash flows at an after-tax cost of capital? The answer is no ifcosts of debt and equity capital receive different tax treatments. For tax purposes, firms cantypically deduct the costs of debt capital but cannot deduct the costs of equity capital.Example 8: Tax Effects on Free Cash FlowsSuppose the firm faces the following costs of capital:DebtEquityPretax:-After-tax:80EProportionin CapitalStructureF30.330.671.00$4Assume that this firm expects to generate $90 million of pretax-free cash flows and $54 mil-lion of after-tax free cash flows [= (10.40) X $90 million] one year from today. This firmwould be valued using pretax and after-tax amounts (assuming a one-year horizon) as follows:888F4PretaxCostR10%18%%These values are not equivalent because cash inflows from assets are taxed at 40 percentand cash outflows to service debt give rise to a tax savings of 40 percent. However, the costof equity capital does not provide a tax benefit. The appropriate valuation in this case is$47.37 million. Thus, the analyst should use after-tax free cash flows and the after-tax costof capital.5Selecting a Forecast HorizonThe analyst will need to project periodic free cash flows over the remaining expected life ofthe resource to be valued. This life is a finite number of years for a resource with a finitephysical life, such as a machine or a building, or a financial instrument with a finite statedmaturity such as a bond a mortgage or a lonce PuTax After-TaxEffectCost0.40F5T6%18%^6F6MacBook AirYWeighted AverageCost of CapitalPretax$90 million X 1/1.1533 = $78.04 million$54 million X 1/1.14 = $47.37 million&3.33%12.00%15.33%7Page < 4JaF7U* 00After-Tax2.00%12.00%14.00%8DIIF81(9DDF9>)00of 5 -F10I'P 380Page <3the effects of general price changes, the discount rate should be a real rate of return, exclud-ing the inflation component.F3Example 7: Nominal versus Real Free Cash FlowsA firm owns an asset that it expects to sell one year from today for $115.5 million. The firmexpects the general price level to increase 10 percent during this period. The real interestrate is 5 percent. The nominal discount rate should be 15.5 percent to measure the com-pound effects of the real rate of interest and inflation [0.155= (1.10 X 1.05)-1].Discounting nominal or real free cash flows, the present value of the asset to the firm is$100 million, as shown:Nominal Free Cash Flows$115.5 millionReal Free Cash Flows$115.5 million/1.10Scanned by CamScanner$4888F4%5XF5XXXIn both computations, we derived the value of the equity of the firm by computing thepresent value of the free cash flows to common equity shareholders. As a practical matter,analysts usually find it more straightforward to discount nominal free cash flows usingnominal discount rates than to adjust nominal free cash flows to real free cash flows andthen discount real free cash flows using real interest rates. Discount rates derived from theCAPM are nominal because the risk-free rate component incorporates expected inflation.Further, stated and effective interest rates on long-term debt also are nominal because theyincorporate expected inflation rates. Thus, readily available or easily estimable discountADiscount Rate IncludingExpected Inflation1/(1.05 X 1.10)6Discount Rate ExcludingExpected Inflation1/1.05MacBook AirF6&7AAF7=* 00=8ate liahilities, revenues, and expenses. TheseValue$100 millionDIIFBValue$100 million(DDF9)> of 50TF10(1F

In the example 8 , will be explaining the pre-tax versus after tax free cash flow In example 7 ,…

Answered: xplain in a few sentences what eac

Business

Finance

xplain in a few sentences what eac

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter6: Interest Rates

Section: Chapter Questions

Problem 20SP: INTEREST RATE DETERMINATION AND YIELD CURVES a. What effect would each of the following events...

See similar textbooks

Similar questions

Assuming a 1-year, money market account investment at 5.315.31 percent (APY), a 3.413.41 percent inflation rate, a 2828 percent marginal tax bracket, and a constant $70 comma 00070,000 balance, calculate the after-tax rate of return, the real rate of return, and the total monetary return. What are the implications of this result for cash management decisions? Question content area bottom Part 1 Assuming a 1-year, money market account investment at 5.315.31% (APY), a 2828% marginal tax bracket, and a constant $ 70 comma 000$70,000 balance, the after-tax rate of return is enter your response here%. (Round to two decimal places.) Part 2 Assuming a 1-year, money market account investment at 5.315.31% (APY), a 2828% marginal tax bracket, and a constant $ 70 comma 000$70,000 balance, the after-tax monetary return is $enter your response here. (Round to the nearest dollar.) Part 3 Given an after-tax return of 3.823.82% and an inflation rate of…
Mf2. 200) Consider a strip mall in Jackson Heights, Queens that recently sold for a cap rate of 7.47%. It's NOI in the following year is $350,000 and is expected to grow at an annual rate of 2%. What is the implied IRR on this investment for the owners of the mall according to the Gordon Growth Dividend Discount model? Write your answer in percent, but do not include the % sign
Q1: Calculate the price, and BEY of a treasury bill that matures in 200 days, has a face value of $10,000, and is currently being quoted at a bank discount yield of 2.% Q2:
H4. The real risk-free rate is 2.15%. Inflation is expected to be 3.15% this year, 4.95% next year, and 2.7% thereafter. The maturity risk premium is estimated to be 0.05 × (t - 1)%, where t = number of years to maturity. What is the yield on a 7-year Treasury note? Do not round intermediate calculations. Round your answer to two decimal places. Please show proper step by step calculation
Assuming a 1-year, money market account investment at 2.122.12 percent (APY), a 0.810.81 percent inflation rate, a 3333 percent marginal tax bracket, and a constant $60 comma 00060,000 balance, calculate the after-tax rate of return, the real rate of return, and the total monetary return. What are the implications of this result for cash management decisions? Question content area bottom Part 1 Assuming a 1-year, money market account investment at 2.122.12% (APY), a 3333% marginal tax bracket, and a constant $ 60 comma 000$60,000 balance, the after-tax rate of return is enter your response here%. (Round to two decimal places.) Part 2 Assuming a 1-year, money market account investment at 2.122.12% (APY), a 3333% marginal tax bracket, and a constant $ 60 comma 000$60,000 balance, the after-tax monetary return is $enter your response here. (Round to the nearest dollar.) Part 3 Given an after-tax return of 1.421.42% and an inflation rate of…
3. Assume that the economy has an annual inflation rate of 5 percent. Are the followinginvestments profitable in real terms?(a) A $1,000 face-value bond, which you purchase at a 30% discount, that pays a monthly coupon of $4. (b) A $1 million house the increases in price by $45,000 per year. You do not rent outthe house, nor do you undertake renovations. (c) A $1 million house that you renovate for $45,000 over the course of a year, causingthe price to increase to $1.1 million.
Q. Emmar Industries borrows $800 million at an interest rate of 7.6%. Emmar will pay tax at an effective rate of 35%. What is the present value of interest tax shields if?(a.) It expects to maintain this debt level into the far future?(b.) It expects to repay the debt at the end of 5 years?(c.) It expects to maintain a constant debt ratio once it borrows the $800 million and rassets =10%?
Mf4. . Assume that you bought a Treasury bill at price=92.450 and sold two days later at 92.550. What is your holding period return? What is your annualized return?
3. The required rate of return, assuming no inflation, is 12%, the sales price of a particular product in a potential project is 6% pa and general inflation is forecast to be 8% pa for the foreseeable future. What rate should be used to discount nominal cashflows? A 18.00% B 18.72% C 20.00% D 20.96%
Part AUsing the following free cash flows and cost of equity = 7%, discount FCF year 1 back to time 0 (today). FCF year 1 = 500; FCF year 2 = 520; FCF year 3 = 560; FCF year 4 = 590; FCF year 5 = 610 a) 429.36 b) 467.29 c) 512.85 d) 422.10Part B Using the following expected interest payments, cost of debt = 5%, and tax-rate = 21%, discount the year 4 expected payment back to time 0 (today). Expected interest year 1 = 50; year 2 = 35; year 3 = 20; year 4 = 10; 5 = 0 a) 9.31 b) 10.11 c) 13.65 d) 6.50
which one is correct answer please confirm? Q23: The real rate of interest is expected to be 3%, and the expected rate of inflation for next year is expected to be 5.5%. If the default risk premium is 1.1 percentage points, and the seniority risk premium is 0.4 percentage points, what is the required return on a 1-year U.S. Treasury security? a. 9.6% b. 10.0% c. 8.9% d. 8.5%
6. The Fisher effect and the cost of unexpected inflation Suppose the nominal interest rate on car loans is 11% per year, and both actual and expected inflation are equal to 4%. Complete the first row of the table by filling in the expected real interest rate and the actual real interest rate before any change in the money supply. Time Period Nominal Interest Rate Expected Inflation Actual Inflation Expected Real Interest Rate Actual Real Interest Rate (Percent) (Percent) (Percent) (Percent) (Percent) Before increase in MS 11 4 4 Immediately after increase in MS 11 4 6 Now suppose the Fed unexpectedly increases the growth rate of the money supply, causing the inflation rate to rise unexpectedly from 4% to 6% per year. Complete the second row of the table by filling in the expected and actual real interest rates on car loans immediately after the increase in the money supply (MS). The unanticipated change in inflation…