EBK CORPORATE FINANCE
4th Edition
ISBN: 9780134202785
Author: DeMarzo
Publisher: VST
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Chapter 15, Problem 9P
Safeco Inc. has no debt, and maintains a policy of holding $10 million in
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Students have asked these similar questions
Bird Enterprises has no debt. Its current total value is $50.8 million. Assume debt
proceeds are used to repurchase equity.
a. Ignoring taxes, what will the company's value be if it sells $20.3 million in debt? (Do
not round intermediate calculations and enter your answer in dollars, not millions of
dollars, round your answer to the nearest whole number, e.g., 1,234,567.)
b. Suppose now that the company's tax rate is 24 percent. What will its overall value be if
it sells $20.3 million in debt? (Do not round intermediate calculations and enter your
answer in dollars, not millions of dollars, rounded to the nearest whole number,
e.g., 1,234,567.)
a. Value of the firm
b. Value of the firm
Safeco Inc. has no debt, and maintains a policy of holding
$12
million in excess cash reserves, invested in risk-free Treasury securities. If Safeco pays a corporate tax rate of
21%,
what is the cost of permanently maintaining this
$12
million reserve?
(Hint:
What is the present value of the additional taxes that Safeco will pay?)
(b) Iron Corporation currently has no debt on its balance sheet. Iron's marginal tax rate
is 30% and the cost of debt is 7%.
() If Iron were to issue sufficient debt to reduce its taxes by $100 million per year
permanently, how much debt would Iron need to issue? What would be the value of
the tax shield?
(i) Iron plans to borrow $5 billion on a permanent basis through a leveraged
recapitalization in which they would use the borrowed funds to repurchase
outstanding shares. Investors pay a tax rate of 35% on their interest income and 15%
on their income from capital gains and dividends. Calculate the present value of the
interest tax shield from this recapitalization from an investor's perspective.
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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- BBA Ltd has just issued $10 million in debt (at par or face value). The firm will pay interest only on this debt. BBA’s marginal tax rate is expected to be 30% for the foreseeable future. a) Suppose BBA pays interest of 6% per year on its debt. What is its annual interest tax shield? b) What is the present value of the interest tax shield, assuming the tax shield’s risk is the same as that of the loan? c) Suppose instead that the interest rate on the debt is 5%. What is the present value of the interest tax shield in this case? Ten years have passed since BBA issued $10 million in perpetual interest-only debt with a 6% annual coupon. Tax rates have remained the same at 30% but interest rates have dropped so BBA’s current cost of debt capital is 4%. d) What is BBA’s annual interest tax shield now? e) What is the present value of the interest tax shield now?arrow_forwardAs a financial analyst at JPMorgan Chase, you are analyzing the impact of debt on the value of the firm. Suppose BAC Company has no debt in its capital structure. The company is valued at $300 million. Assume the corporate tax rate is 20%. a. What would be the value of tax shield if it issued $100 million in perpetual debt and repurchased the equity? (sample answer: 200.40) b. What would be the value of the firm if it issued $100 million in perpetual debt and repurchased the equity? ( sample answer: 200.40)arrow_forwardShadow, Inc., is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4.5 million worth of debt outstanding. The cost of this debt is 8 percent per year. Shadow expects to have an EBIT of $1.8 million per year in perpetuity. Shadow pays no taxes. (1) What is the expected return on the equity of an otherwise identical all-equity firm? (2) What is the expected return on the firm’s equity after the announcement of the stock repurchase plan?arrow_forward
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