Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259277214
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 13.4, Problem 13.4ACQ
Summary Introduction
To discuss: The relationship between the unlevered firm value and levered firm value after the consideration of corporate taxes effect
Introduction:
The corporate tax is a charge placed on the profit of the company to increase the taxes.
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Students have asked these similar questions
How would an increase in corporate taxes tend to affect an average firm’s capitalstructure? What about an increase in the personal tax rate?
Identify and explain each of the if it encourage a firm to increase or decrease debt in its capital structure?
a. The corporate tax rate increases
b. The personal tax rate increases
c. Due to market changes, the firm's assets become less liquid
d. The firm's sales and earnings become more volatile.
It has been suggested that in a world with only corporate taxation the value of the firm = the value of all equity financed + the present value of tax shield on debt finance
How far do existing capital structures of companies compare with the most appropriate structure according to the equation?
Chapter 13 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 13.1 - What is the relationship between the WACC and the...Ch. 13.1 - Prob. 13.1BCQCh. 13.2 - Prob. 13.2ACQCh. 13.2 - Prob. 13.2BCQCh. 13.2 - Prob. 13.2CCQCh. 13.3 - What does MM Proposition I state?Ch. 13.3 - Prob. 13.3BCQCh. 13.3 - Prob. 13.3CCQCh. 13.4 - Prob. 13.4ACQCh. 13.4 - Prob. 13.4BCQ
Ch. 13.5 - Prob. 13.5ACQCh. 13.5 - Prob. 13.5BCQCh. 13.6 - Can you describe the tradeoff that defines the...Ch. 13.6 - What are the important factors in making capital...Ch. 13.7 - Prob. 13.7ACQCh. 13.7 - Prob. 13.7BCQCh. 13.8 - What is the APR (in connection with bankruptcy...Ch. 13.8 - What is the difference between liquidation and...Ch. 13 - Prob. 13.3CCh. 13 - Prob. 13.4CCh. 13 - Prob. 13.5CCh. 13 - Section 13.6The static theory of capital structure...Ch. 13 - Prob. 13.7CCh. 13 - Business Risk versus Financial Risk. Explain what...Ch. 13 - Prob. 2CTCRCh. 13 - Prob. 3CTCRCh. 13 - Prob. 4CTCRCh. 13 - Prob. 5CTCRCh. 13 - Prob. 6CTCRCh. 13 - Prob. 7CTCRCh. 13 - Prob. 8CTCRCh. 13 - Prob. 9CTCRCh. 13 - Prob. 10CTCRCh. 13 - EBIT and Leverage. Kaelea, Inc., has no debt...Ch. 13 - EBIT, Taxes, and Leverage. Repeat parts (a) and...Ch. 13 - Prob. 3QPCh. 13 - Break-Even EBIT. Kyle Corporation is comparing two...Ch. 13 - Prob. 5QPCh. 13 - Prob. 6QPCh. 13 - Prob. 7QPCh. 13 - Prob. 8QPCh. 13 - Homemade Leverage. Lydie Enterprises is...Ch. 13 - Calculating WACC. Crosby Industries has a...Ch. 13 - Calculating WACC. Malkin Corp. has no debt but can...Ch. 13 - Prob. 12QPCh. 13 - Prob. 13QPCh. 13 - Prob. 14QPCh. 13 - MM. In the previous question, what is the...Ch. 13 - Prob. 16QPCh. 13 - Prob. 17QPCh. 13 - Prob. 18QPCh. 13 - Prob. 19QPCh. 13 - Business and Financial Risk. Assume a firms debt...Ch. 13 - Prob. 1CCCh. 13 - Prob. 2CCCh. 13 - Stephenson Real Estate Recapitalization Stephenson...Ch. 13 - Prob. 4CCCh. 13 - Prob. 5CC
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- What would be a reason a company would want to understate income? A. to help nudge its stock price higher B. to lower its tax bill C. to show an increase in overall profits D. to increase investor confidencearrow_forwardWhich of the following is a political risk to a company's bottom line? Spot exchange rates Changing tax rates Stable exchange rates Forward tax ratesarrow_forwardWhich of the following makes this a true statement? In this slightly more realistic world with corporate taxes, managers can: Multiple Choice maximize the firm's value by taking on as much equity as possible. maximize the firm's value by taking on as much debt as possible. minimize the firm's value by taking on as much debt as possible. maximize the firm's value by financing only with debt.arrow_forward
- Which of the following would reduce a firm's WACC after tax? a. A firm invests in an average-risk project using equity, rather than debt financing. b. A supermarket chain decides to establish hardware stores which increases its systematic risk. c. A firm issues shares and uses the proceeds to pay off a bank loan. d. A firm issues bonds and uses the proceeds to repurchase stock. e. A firm significantly improves its operating cost control to boost profits.arrow_forwardAssume the government introduces a lump-sum tax on each firm within a perfectly competitive industry. Which of the following will be true after the introduction of this tax? a. Consumer prices will increase b. There will be no change in any firm’s level of profits c. A deadweight efficiency loss will occur d. There will be no change in the market quantity of outputarrow_forwardWhat does an increase in the tax rate on corporate profits do to a firm’s coverage ratio? increases it decreases it nothingarrow_forward
- If Congress wants to stimulate the economy, explainhow it might alter each of the following: (a) personaland corporate tax rates, (b) depreciation expenseschedules, and (c) the differential between the taxrate on personal income and long-term capitalgains. How would these changes affect corporateprofitability and free cash flow? How would theyaffect investors’ choices regarding which securities to hold in their portfolios? Might any of theseactions affect the general level of interest rates?arrow_forwardthe effects of increasing the amount paid upfront when corporations make capital purchases with a focus on the benefits and the drawbacks.arrow_forwardAccording to the M&M propositions WITH and WITHOUT taxes, should a financial manager spend time analysing a firm’s capital structure? What is the optimal capital structure with and without tax? Discuss.arrow_forward
- Which of the following statements is most accurate? A. Financial leverage is directly related to operating leverage. B. Increasing the corporate tax rate will not affect capital structure decisions. C. A firm with low operating leverage has a small proportion of its total costs in fixed costs. D. Total costs can be calculated as net income minus total revenue.arrow_forwardWhat does the MM theory with no taxes state about the valueof a levered firm versus the value of an otherwise identical butunlevered firm? What does this imply about the optimal capitalstructure?arrow_forward
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