EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103145947
Author: DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Concept explainers
Videos
Textbook Question
Chapter 18, Problem 15P
Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.50. For each year into the indefinite future, Remex’s
- a. Using the information provided, complete the following table:
- b. Using the information provided and your calculations in part a, determine the value of the tax shield acquired by Remex if it changes its capital structure in the way it is considering.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Barnette Inc.'s free cash flows are expected to be unstable during the next few years while the company undergoes restructuring. However, FCF is expected to be $42 million in Year 5, i.e., FCF at t = 5 equals $47 million, and the FCF growth rate is expected to be constant at 8% beyond that point. If the weighted average cost of capital is 13.2%, what is the horizon value (in millions) at t = 5?
(Round your answer to 2 decimal places.)
Kohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity.
Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, and the only capital market imperfections are corporate taxes and financial distress costs.
a. What is the NPV of Kohwe's investment?
b. What is the value of Kohwe if it finances the investment with equity?
a. What is the NPV of Kohwe's investment?
The NPV of Kohwe's investment is $
million. (Round to two decimal places.)
b. What is the value of Kohwe if it finances the investment with equity?
The
Kohwe
finances
stment with equity
$
million. (Round
decimal places.)
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?
Cash flow in the next year
Probability Amount
Economy
Boom
0.3
$110 million
Normal
0.4
$101 million
Recession 0.3
$61 million
$26.8 million
$24.7 million
$0
-$18.3 million
Chapter 18 Solutions
EBK CORPORATE FINANCE
Ch. 18.1 - What are the three methods we can use to include...Ch. 18.1 - Prob. 2CCCh. 18.2 - Prob. 1CCCh. 18.2 - Prob. 2CCCh. 18.3 - Prob. 1CCCh. 18.3 - Prob. 2CCCh. 18.4 - Prob. 1CCCh. 18.4 - Prob. 2CCCh. 18.5 - How do we estimate a projects unlevered cost of...Ch. 18.5 - What is the incremental debt associated with a...
Ch. 18.6 - Prob. 1CCCh. 18.6 - Prob. 2CCCh. 18.7 - How do we deal with issuance costs and security...Ch. 18.7 - Prob. 2CCCh. 18.8 - When a firm has pre-determined tax shields, how do...Ch. 18.8 - Prob. 2CCCh. 18 - Prob. 1PCh. 18 - Prob. 2PCh. 18 - In 2015, Intel Corporation had a market...Ch. 18 - Prob. 4PCh. 18 - Suppose Goodyear Tire and Rubber Company is...Ch. 18 - Suppose Alcatel-Lucent has an equity cost of...Ch. 18 - Acort Industries has 10 million shares outstanding...Ch. 18 - Prob. 8PCh. 18 - Prob. 9PCh. 18 - Consider Alcatel-Lucents project in Problem 6. a....Ch. 18 - Consider Alcatel-Lucents project in Problem 6. a....Ch. 18 - In year 1, AMC will earn 2000 before interest and...Ch. 18 - Prokter and Gramble (PKGR) has historically...Ch. 18 - Amarindo, Inc. (AMR), is a newly public firm with...Ch. 18 - Remex (RMX) currently has no debt in its capital...Ch. 18 - You are evaluating a project that requires an...Ch. 18 - Prob. 17PCh. 18 - You are on your way to an important budget...Ch. 18 - Your firm is considering building a 600 million...Ch. 18 - Prob. 20PCh. 18 - DFS Corporation is currently an all-equity firm,...Ch. 18 - Prob. 22PCh. 18 - Prob. 23PCh. 18 - Prob. 24PCh. 18 - XL Sports is expected to generate free cash flows...Ch. 18 - Propel Corporation plans to make a 50 million...Ch. 18 - Gartner Systems has no debt and an equity cost of...Ch. 18 - Revtek, Inc., has an equity cost of capital of 12%...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Gupta Corporation is undergoing a restructuring, and its free cash flows are expected to vary considerably during the next few years. However, the FCF is expected to be $85.00 million in Year 5, and the FCF growth rate is expected to be a constant 6.5% beyond that point. The weighted average cost of capital is 12.0%. What is the horizon (or continuing) value (in millions) at t = 5? a. $1,646 O b. $1,234 O c. $1,432 d. $1,662 O e. $2,041arrow_forwardHappy 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 millionarrow_forwardRolex, Inc. has equity with a market value of $20 million and debt with a market value of $20 million. Assume the firm has no default risk and can borrow at the risk-free interest rate. The risk-free interest rate is 5 percent per year, and the expected return on the market portfolio is 11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost of capital for an otherwise identical all-equity firm? O 7.77% O 9.00% O 10.14% O 8.27%arrow_forward
- Zerox Inc. is contemplating acquiring its peer firm-Nova Corporation since Zerox believes that Nova is poorly managed. The most recent information about Nova is as follows: FCFF = 200 million, Market value of equity=$2,000 million, Outstanding debt=200 million, Before-tax cost of debt=5%, Tax rate=30%, Beta=1. Nova is already in steady state and is expected to grow 6% a year in the long term. The treasury bond rate is 3%, and the market risk premium is 6%. Zerox believes that the current financial leverage of Nova is not optimal and intends to increase the debt ratio of Nova to 20% of total capital from current level after the acquisition, which will incur a cost of debt of 5.5%. How much is the value of control worth in this acquisition plan?rnrnGroup of answer choicesrnrna). $203.27 millionrnb). $2,526.32 millionrnc). $2,152.28 millionrnd). $756.50 millionrne). $193.27 millionarrow_forwardA firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity financing for the project. Also, the firm has 1,000,000 common shares outstanding with a current market price of GH¢11 per share. Next year's dividend is expected to be GH¢1 per share and the firm estimates dividends will grow at 5% per year for the next several years. The firm also has 150,000 preferred shares outstanding with a current market price of GH¢10 per share. Dividend of GH¢0.9 per share is paid on preferred stock. The firm has a total of GH¢10,000,000 in debt outstanding. The debt stock is currently valued at of GH¢9,500,000. The yield on the debt is 8%. The firm's tax rate is 20%. The project requires an initial capital investment of GH¢500,000. However, the project is expected to generate GH¢100,000 annually in perpetuity. Required: i. Calculate the…arrow_forwardA firm is considering a new project which would be similar in terms of risk to its existing projects. The firm needs a discount rate for evaluation purposes. The firm has enough cash on hand to provide the necessary equity financing for the project. Also, the firm has 1,000,000 common shares outstanding with a current market price of GH¢11 per share. Next year’s dividend is expected to be GH¢1 per share and the firm estimates dividends will grow at 5% per year for the next several years. The firm also has 150,000 preferred shares outstanding with a current market price of GH¢10 per share. Dividend of GH¢0.9 per share is paid on preferred stock. The firm has a total of GH¢10,000,000 in debt outstanding. The debt stock is currently valued at of GH¢9,500,000. The yield on the debt is 8%. The firm’s tax rate is 20%. The project requires an initial capital investment of GH¢500,000. However, the project is expected to generate GH¢100,000 annually in perpetuity. Required: Calculate the…arrow_forward
- Suppose that Banana Computers has $1,000 in revenue this year, along with COGS of $400 and SG&A of $100. The required rate of return on its equity is 14%, and the risk-free rate is 5%. Assume that the COGS only include the marginal costs of selling a computer. Banana is considering adding $700 worth of debt with a coupon rate of 5% and an YTM of 7.9% to its capital structure. Suppose, revenues fall by $300,what is the percent change in net income with and without the debt? Assume that the total variable production costs remain the same. (Round the answer to one decimal places.) a. 59.2% and 40.8% b. 60.0% and 64.5% c. 64.5% and 60% d. 40.8% and 59.2%arrow_forwardRolex, Inc. has equity with a market value of $20 million and debt with a market value of $10million. Assume the firm has no default risk and can borrow at the risk-free interest rate. Therisk-free interest rate is 5 percent per year, and the expected return on the market portfolio is11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost ofcapital for an otherwise identical all-equity firm? handwrite pleasearrow_forwardThe Leap Corporation expects next year’s net income to be P15 million. The firm’s debt ratio is currently 40%. Leap has P12 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual distribution model (assuming all payments are in the form of dividends), how large should Leap's dividend payout ratio be next year?arrow_forward
- 24. Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.50. For each year into the indefinite future, Remex's free cash flow is expected to equal $25 million. Remex is considering changing its capital structure by issuing debt and using the proceeds to buy back stock. It will do so in such a way that it will have a 30% debt-equity ratio after the change, and it will maintain this debt-equity ratio forever. Assume that Remex's debt cost of capital will be 6.5%. Remex faces a corporate tax rate of 15%. Except for the corporate tax rate of 15%, there are no market imperfections. Assume that the CAPM holds, the risk-free rate of interest is 5%, and the expected return on the market is 11%. a. Using the information provided, complete the following table: Before change in capital structure After change in capital structure Debt-Equity Ratio 0 0.30 Debt Cost of Capital N/A 6.5% Equity Cost of Capital Weighted Average Cost of Capital b. Using the information…arrow_forwardExxo Mobile expects an EBIT of $20,000 every year in perpetuity. The firm currently has no debt, and its cost of equity is 15 percent. The tax rate is 30 percent. The firm plans to borrow money to repurchase its stock such that the debt-value ratio after the restructuring becomes 50 percent permanently. What is the firm value if the firm borrows at 8 percent? O $135,922.33 O $93,333.33 O $156,862.75 O $109,803.92arrow_forwardDyrdek Enterprises has equity with a market value of $1.8 million and the market value of debt is $3.55 million. The company is evaluating a new project that has more risk than the firm. As a result, the company will apply a risk adjustment factor of 1.6 percent. The new project will cost $2.20 million today and provide annual cash flows of $576,000 for the next 6 years. The company's cost of equity is 11.07 percent and the pretax cost of debt is 4.88 percent. The tax rate is 21 percent. What is the project's NPV?arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Essentials Of InvestmentsFinanceISBN:9781260013924Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.Publisher:Mcgraw-hill Education,
Foundations Of FinanceFinanceISBN:9780134897264Author:KEOWN, Arthur J., Martin, John D., PETTY, J. WilliamPublisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...FinanceISBN:9781337395250Author:Eugene F. Brigham, Joel F. HoustonPublisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...FinanceISBN:9780077861759Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan ProfessorPublisher:McGraw-Hill Education
Essentials Of Investments
Finance
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:9780134897264
Author:KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:Pearson,
Fundamentals of Financial Management (MindTap Cou...
Finance
ISBN:9781337395250
Author:Eugene F. Brigham, Joel F. Houston
Publisher:Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i...
Finance
ISBN:9780077861759
Author:Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:McGraw-Hill Education
What is WACC-Weighted average cost of capital; Author: Learn to invest;https://www.youtube.com/watch?v=0inqw9cCJnM;License: Standard YouTube License, CC-BY