Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134101477
Author: Berk
Publisher: PEARSON
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Chapter 15, Problem 24P
Suppose the tax rate on interest income is 35%, and the average
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Suppose a firm has $10 million in debt that it expects to hold in perpetuity. It the interest rate is 7 percent and the corporate tax rate is 35 percent, what is the value of the interest tax shield?
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Chapter 15 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
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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- 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?arrow_forwardUrsala, Incorporated, has a target debt-equity ratio of 1.25. Its WACC is 8.4 percent and the tax rate is 23 percent. If the company’s cost of equity is 12.4 percent, what is its pretax cost of debt? If instead you know that the aftertax cost of debt is 3.6 percent, what is the cost of equity?arrow_forwardYour company has a pre-tax cost of debt of 6%. You anticipate the corporate tax rate will go from 21% to 28% in the near future. What impact will the tax change have on your debt cost of capital as an input to your overall cost of capital?arrow_forward
- 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.)arrow_forwardyour firm has a debt-equity ratio of .75. your pre tax cost of debt is 8.5% and your unlevered equity cap rate is 15%. what is your cost of levered equity if you ignore taxesarrow_forwardStarset, Incorporated, has a target debt-equity ratio of 0.76. Its WACC is 10.5 percent, and the tax rate is 32 percent. If the company's cost of equity is 14.5 percent, what is the pretax cost of debt? If instead you know that the aftertax cost of debt is 6.7 percent, what is the cost of equity?arrow_forward
- Suppose the corporate tax rate is 38%, and investors pay a tax rate of 25% on income from dividends or capital gains and a tax rate of 35.5% on interest income. Your firm decides to add debt so it will pay an additional $15 million in interest each year. It will pay this interest expense by cutting its dividend. By how much will the firm need to cut its dividend each year to pay this interest expense?arrow_forwardWhat 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?arrow_forwardLaurel, Inc., has debt outstanding with a coupon rate of 5.8% and a yield to maturity of 6.8%. Its tax rate is 40%. 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.arrow_forward
- Given the following information, leverage will add how much value to the unlevered firm per dollar of debt? Corporate tax rate: 34% Personal tax rate on income from bonds: 40% Personal tax rate on income from stocks: 30%I know the answer is 0.138 dollars, but following your method the answer is 0.23 dollars. Are you sure this is correct?arrow_forwardBulldogs Inc., which has 20% income tax rate, is funded by debt and common equity. The equity ratio of the company is 70% while the weighted average cost of capital is 20.75%. The cost of equity, which is based on the readily available data, is calculated using cost of retained earnings at 12.50%. What is the cost of debt after the effect of tax shield?arrow_forwardSuppose that TipsNToes, Inc.'s capital structure features 75 percent common equity, 25 percent debt, and its cost of equity is 12 percent, while its before-tax cost of debt is 10 percent. It has no preferred stock. If the appropriate tax rate is 40%, what will be TipsNToes's after-tax WACC?arrow_forward
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