EBK FUNDAMENTALS OF CORPORATE FINANCE
9th Edition
ISBN: 9781260049237
Author: BREALEY
Publisher: MCGRAW HILL BOOK COMPANY
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Chapter 16, Problem 16QP
Summary Introduction
To compute: The changes in after tax income for debt and equity combination.
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Tax Shields. River Cruises (see Section 16.1) is all-equity-financed with 100,000 shares.It now proposes to issue $250,000 of debt at an interest rate of 10% and to use the proceeds to repurchase 25,000 shares. Suppose that the corporate tax rate is 35%. Calculate the dollarincrease in the combined after-tax income of its debtholders and equityholders if profits beforeinterest are: (LO16-2)a. $75,000.b. $100,000.c. $175,000.
Target Corporation (TGT) has $2.14 million in assets that are currently financed with 100% equity. TGT’s EBIT is $385,000, and its tax rate is 25%. If TGT changes its capital structure to include 50% debt, its return on equity will increase. Assume the interest rate on debt is free. (justify your answer with numerical calculation)
True
False
PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $20 million, $28
million, or $36 million. Its corporate tax rate is 38%, and investors pay a 30% tax rate on income from equity and a
35% tax rate on interest income.
a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year?
b. What is the effective tax advantage of debt for interest expenses in excess of $36 million? (Ignore carryforwards).
c. What is the expected effective tax advantage of debt for interest expenses between $20 million and $28 million?
(Ignore carryforwards).
d. What level of interest expense provides PMF with the greatest tax benefit?
a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year?
%. (Round to one
If PMF has interest expenses of $16 million this coming year, the effective tax advantage is
decimal place.)
Chapter 16 Solutions
EBK FUNDAMENTALS OF CORPORATE FINANCE
Ch. 16 - Prob. 1QPCh. 16 - Prob. 2QPCh. 16 - Prob. 3QPCh. 16 - Prob. 4QPCh. 16 - Prob. 5QPCh. 16 - Prob. 6QPCh. 16 - Prob. 7QPCh. 16 - Prob. 8QPCh. 16 - Prob. 9QPCh. 16 - Leverage and the Cost of Capital. Increasing...
Ch. 16 - Prob. 11QPCh. 16 - Prob. 12QPCh. 16 - Prob. 13QPCh. 16 - Prob. 14QPCh. 16 - Prob. 15QPCh. 16 - Prob. 16QPCh. 16 - Tax Shields. Establishment Industries borrows 800...Ch. 16 - Prob. 18QPCh. 16 - Prob. 19QPCh. 16 - Prob. 20QPCh. 16 - Prob. 21QPCh. 16 - Prob. 22QPCh. 16 - Prob. 23QPCh. 16 - Prob. 24QPCh. 16 - Prob. 25QPCh. 16 - Prob. 26QPCh. 16 - Prob. 27QPCh. 16 - Prob. 28QPCh. 16 - Prob. 29QPCh. 16 - Prob. 30QPCh. 16 - Prob. 31QPCh. 16 - Prob. 32QPCh. 16 - Prob. 33QPCh. 16 - Prob. 34QPCh. 16 - Prob. 35QPCh. 16 - Prob. 36QPCh. 16 - Prob. 37QP
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