EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 15, Problem 15P
Acme Storage has a market capitalization of $100 million and debt outstanding of $40 million. Acme plans to maintain this same debt-equity ratio in the future. The firm pays an interest rate of 7.5% on its debt and has a corporate tax rate of 35%.
- a. If Acme’s
free cash flow is expected to be $7 million next year and is expected to grow at a rate of 3% per year, what is Acme’s WACC? - b. What is the value of Acme's interest tax shield?
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Happy Time Inc. is expected to generate the following cash flows for the next year, as shown in the table below. Happy Time now only has one outstanding debt with
a face value of $110 million to be repaid in the next year. The current market value for the debt is $67 million. The tax rate is zero. If the firm is financed by common
equity and debt, what is the expected value of common equity next year?
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Economy
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0.3
$110 million
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$101 million
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Happy Time Inc. is expected to generate the following cash flows for the next year, as shown in the table
below. Happy Time now only has one outstanding debt with a face value of $110 million to be repaid in the
next year. The current market value for the debt is $67 million. The tax rate is zero. If you invest in the
corporate debt of Happy Time Inc. today, what is your expected percentage return on this investment?
Cash flow in the next year
Economy Probability Amount
Boom
0.3
Normal 0.4
Recession 0.3
O 36.87%
O -26.37%
64.8%
O-16.63%
$110 million
$101 million
$61 million
Tin Roof's net cash flows for the next three years are projected at $72,000, $78,000, and $84,000,
respectively. After that the cash flows are expected to increase by 2.5 percent annually. Recently issued debt
carries an interest rate of 7.85%. Tin Roof's marginal tax rate is 21%. The cost of equity is 11.4 percent.
a) What is the value of the firm if it is financed with 40 percent debt and 60 percent equity?
b) Tin Roof has 20,300 outstanding shares and are currently trading for $29.00 per share. At this price do
you believe that Tin Roof shares are over priced, under priced or fairly priced. Please justify your answer.
Chapter 15 Solutions
EBK CORPORATE FINANCE
Ch. 15.1 - With corporate income taxes, explain why a firms...Ch. 15.1 - Prob. 2CCCh. 15.2 - With corporate taxes as the only market...Ch. 15.2 - How does leverage affect a firms weighted average...Ch. 15.3 - How can shareholders benefit from a leveraged...Ch. 15.3 - How does the interest tax shield enter into the...Ch. 15.4 - Prob. 1CCCh. 15.4 - How does this personal tax disadvantage of debt...Ch. 15.5 - How does the growth rate of a firm affect the...Ch. 15.5 - Do firms choose capital structures that fully...
Ch. 15 - Prob. 1PCh. 15 - Grommit Engineering expects to have net income...Ch. 15 - Suppose the corporate tax rate is 40%. Consider a...Ch. 15 - Braxton Enterprises currently has debt outstanding...Ch. 15 - Your firm currently has 100 million in debt...Ch. 15 - Arnell Industries has just issued 10 million in...Ch. 15 - Prob. 7PCh. 15 - Prob. 8PCh. 15 - Safeco Inc. has no debt, and maintains a policy of...Ch. 15 - Rogot Instruments makes fine violins and cellos....Ch. 15 - Rumolt Motors has 30 million shares outstanding...Ch. 15 - Summit Builders has a market debt-equity ratio of...Ch. 15 - NatNah, a builder of acoustic accessories, has no...Ch. 15 - Restex maintains a debt-equity ratio of 0.85, and...Ch. 15 - Acme Storage has a market capitalization of 100...Ch. 15 - Milton Industries expects free cash flow of 5...Ch. 15 - Prob. 17PCh. 15 - Kurz Manufacturing is currently an all-equity firm...Ch. 15 - Rally, Inc., is an all-equity firm with assets...Ch. 15 - Prob. 20PCh. 15 - Facebook, Inc. had no debt on its balance sheet in...Ch. 15 - Markum Enterprises is considering permanently...Ch. 15 - Garnet Corporation is considering issuing...Ch. 15 - Suppose the tax rate on interest income is 35%,...Ch. 15 - With its current leverage, Impi Corporation will...Ch. 15 - Colt Systems will have EBIT this coming year of 15...Ch. 15 - PMF, Inc., is equally likely to have EBIT this...
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