Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 15, Problem 5MC
What happens to
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Given the following information, how much value will leverage will add to, or subtract from, the firm if the firm were to add one additional pound of debt?
Corporate tax = 15%
Personal tax on debt = 30%
Personal tax on equity = 10%
Select one:
-0.09
0.00
0.30
0.55
None of the above
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?
Given the following information, leverage will add how much value to the unlevered firm per dollar of debt?Corporate tax rate: 35%Personal tax rate on income from bonds: 25%Personal tax rate on income from stocks: 30%
A.
$-0.625
B.
$0.287
C.
$0.393
D.
$0.635
E.
None of these
Chapter 15 Solutions
Financial Management: Theory & Practice
Ch. 15 - Prob. 1QCh. 15 - What term refers to the uncertainty inherent in...Ch. 15 - Firms with relatively high nonfinancial fixed...Ch. 15 - “One type of leverage affects both EBIT and EPS....Ch. 15 - Why is the following statement true? Other things...Ch. 15 - Why do public utility companies usually have...Ch. 15 - Why is EBIT generally considered to be independent...Ch. 15 - If a firm went from zero debt to successively...Ch. 15 - Prob. 9QCh. 15 - Prob. 1P
Ch. 15 - Counts Accountings beta is 1.2 and its tax rate is...Ch. 15 - Ethier Enterprise has an unlevered beta of 1.0....Ch. 15 - Quillpen Company is unlevered and has a value of...Ch. 15 - Walkrun Inc. is unlevered and has a value of 400...Ch. 15 - Cruz Corporation has 100 billion of debt...Ch. 15 - Nichols Corporations value of operations is equal...Ch. 15 - Lee Manufacturings value of operations is equal to...Ch. 15 - Dye Trucking raised $150 million in new debt and...Ch. 15 - Schweser Satellites Inc. produces satellite earth...Ch. 15 - The Rivoli Company has no debt outstanding, and...Ch. 15 - Pettit Printing Company (PPC) has a total market...Ch. 15 - Beckman Engineering and Associates (BEA) is...Ch. 15 - F. Pierce Products Inc. is considering changing...Ch. 15 - A. Fethe Inc. is a custom manufacturer of guitars,...Ch. 15 - Start with the partial model in the file Ch15 P13...Ch. 15 - Assume you have just been hired as a business...Ch. 15 - Prob. 2MCCh. 15 - Prob. 3MCCh. 15 - To illustrate the effects of financial leverage...Ch. 15 - What happens to ROE for Firm U and Firm L if EBIT...Ch. 15 - What does capital structure theory attempt to do?...Ch. 15 - Prob. 7MCCh. 15 - Liu Industries is a highly levered firm. Suppose...Ch. 15 - How do companies manage the maturity structure of...
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- What is the value of Ls stock for volatilities between 0.20 and 0.95? What incentives might the manager of L have if she understands this relationship? What might debtholders do in response?arrow_forwardNext, we need to calculate MMMs cost of debt. We can use different approaches to estimate it One approach is to take the companys interest expense and divide it by total debt (which is the sum of short-term debt and long-term debt). This approach only works if the historical cost of debt equals the yield to maturity in todays market (i.e., if MMMs outstanding bonds are trading at dose to par). This approach may produce misleading estimates in years in which MMM issues a significant amount of new debt. For example, if a company issues a great deal of debt at the end of the year, the full amount of debt will appear on the year-end balance sheet, yet we still may not see a sharp increase in annual interest expense because the debt was outstanding for only a small portion of the entire year. When this situation occurs, the estimated cost of debt will likely understate the true cost of debt. Another approach is to try to find this number in the notes to the companys annual report by accessing the company's home page and its Investor Relations section. Alternatively, you can go to other external sources, such as bondsonline.com, for corporate bond spreads, which can be used to find estimates of the cost of debt. Finally, you can also go to Morningstar.com, which will provide yield to maturity information on the firms various bond issues. A longer-term issues YTM could provide an estimate of the firms current cost of debt to be used in the WACC calculation. Remember that you need the after-tax cost of debt to calculate a firm's WACC, so you will need MMMs tax rate (which has averaged around 30% in recent years). What is your estimate of MMMs after-tax cost of debt?arrow_forwardWhere do we generally find optimal level of debt? A. where the tax shield is maximized B. the amount of debt such that the YTM is 5.5% or less C. where debt equals equity D. whatever will yield a FICO sore of 700 or better E. consistent with a low investment grade debt ratingarrow_forward
- WHICH OF THE FOLLOWING STATEMENTS IS MOST CORRECT? A. IF A FIRM'S EXPECTED BASIC EARNING POWER (BEP) IS CONSTANT FOR ALL ITS ASSETS AND EXCEES INTEREST RATE ON ITS DEBT, THEN ADDING ASSETS FINANCING THEM WITH DEBT WILL RAISE THE FIRM'S EXPECTED RATE OF RETURN ON COMMON EQUITY (ROE)? B. THE HIGHER ITS TAX RATE, THE LOWER A FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. C. THE HIGHER THE INTEREST RATE ON ITS DEBT, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. D. THE HIGHER ITS DEBT RATIO, THE LOWER THE FIRM'S BEP RATIO WILL BE, OTHER THINGS HELD CONSTANT. E. STATEMENT A IS FALSE, BUT B, C AND D ARE ALL TRUE.arrow_forwardWhich of the following will increase a firm's aftertax cost of debt financing? Select one: a. increase in a bond's current market price b. decrease in the corporate tax rate c. increase in the dividend yield d. decrease in the market rate of interestarrow_forwardTomorrow Co is financed entirely by equity that is priced to offer a 14% expected return on equity. If the company repurchases 40% of equity and substitutes an equal value of debt yielding 8%, what is the expected return on equity after refinancing? (Ignore taxes and cost of financial distress.)arrow_forward
- Ursala, 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_forwardGive typing answer with explanation and conclusion If the company were to borrow more (or less), how would that impact the cost of debt and the WACC? Provide a specific assumed example. Weight of Equity 76.10% Weight of Debt 23.90% Cost of Equity 6.98% Cost of Debt 2.55% Tax Rate WACC 5.92%arrow_forwardIf a firm now has a debt ratio of 50% but plans to finance with only 40% debt in thefuture, what should it use as wd when it calculates its WACC? Explain.arrow_forward
- A firm has a total market value of $10 million while its debt has a market value of $4 million. What is the after-tax weighted average cost of capital if the before-tax cost of debt is 10% the cost of equity is 15%, and the tax rate is 21%? Multiple Choice A) 10.4% B) 8.8% C) 12.2% D) 13.0%arrow_forwardHow would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 4) The dividend payout ratio is increased. 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.arrow_forwardHow would each of the following scenarios affect a firm's cost of debt, r d (l - t), t=tax rate; its cost of equity, rs; and its WACC? Indicate with an increase (I), a decreease (D), or no change (N) whether the factor would raise, lower, or have an indeterminate effect on the item in question. Assume for each answer that other things are held constant, even though in some instances this would probably not be true. rd (1-t) rs WACC 1) The corporate tax rate is lowered. 2) The Federal Reserve tightens credit. 3) The firm uses more debt; that is, it increases its debt ratio 4) The dividend payout ratio is increased. 5) The firm expands into a risky new area. 6) Investors become more risk-averse. 7) The firm is an electric utility with a large investment innuclear plants. Several states are considering a ban on nuclear power generation.arrow_forward
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