PRIN.OF CORPORATE FINANCE >BI<
12th Edition
ISBN: 9781260431230
Author: BREALEY
Publisher: MCG CUSTOM
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Question
Chapter 18, Problem 1PS
Summary Introduction
To discuss: The assumption under which the present value (PV) calculation is correct.
Expert Solution & Answer
Explanation of Solution
The PV calculation assumes that the debt is fixed and perpetual, rate of tax is fixed, the personal tax rates on interest of investors and equity income are same. These assumptions proves that the calculation of PV is correct.
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Students have asked these similar questions
D4)
When estimating cost of debt, the coupon rate is used as the cost of debt.
Group of answer choices
True
False
The after tax or effective cost of debt is increased by the tax savings since interest payments on debt are tax deductible.
Group of answer choices
True
False
Explain the concept of Tax Deduction in WACC. Does this tax deduction make debt finance Cheaper Then Equity Finance
Choose a,b,c,d,e for the following:
Question 1 -
Debt x Interest Rate x Tax Rate:
a. gives us the value of taxes saved due to interest expense.
b. gives us the value of taxes paid on the interest.
c. gives us the value of the annual dividend tax shield.
d. gives us the present value of the annual interest tax shield.
e. allows us to save taxes because equity is tax deductible.
Chapter 18 Solutions
PRIN.OF CORPORATE FINANCE >BI<
Ch. 18 - Prob. 1PSCh. 18 - Tax shields Here are book and market value balance...Ch. 18 - Prob. 3PSCh. 18 - Tax shields The firm cant use interest tax shields...Ch. 18 - Financial distress This question tests your...Ch. 18 - Prob. 6PSCh. 18 - Prob. 7PSCh. 18 - Debt ratios Rajan and Zingales identified four...Ch. 18 - Prob. 9PSCh. 18 - Pecking-order theory Fill in the blanks: According...
Ch. 18 - Financial slack For what kinds of companies is...Ch. 18 - Tax shields Compute the present value of interest...Ch. 18 - Tax shields Suppose that Congress sets the top...Ch. 18 - Tax shields The trouble with MMs argument is that...Ch. 18 - Tax shields Look back at the Johnson Johnson...Ch. 18 - Agency costs Let us go back to Circular Files...Ch. 18 - Agency costs The Salad Oil Storage (SOS) Company...Ch. 18 - Prob. 20PSCh. 18 - Agency costs The possible payoffs from Ms....Ch. 18 - Leverage targets Some corporations debtequity...Ch. 18 - Prob. 25PSCh. 18 - Trade-off theory The trade-off theory relies on...
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Similar questions
- If a firm's marginal tax rate is increased, this means that other things held constant, lower the cost of debt used to calculate its WACC. True Falsearrow_forwardCompare the coupon rate and the interest rate regarding bonds. What is a par value? Describe the impact of a tax shield on fixed income yields.arrow_forwardOf the following, the most likely effect of an increase in income tax rates would be to: A) Decrease the savings rate B) Decrease the supply of loanable funds C) Increase interest rates a. All statements are correct. b. Only one statement is correct. c. Only one statement is incorrect.arrow_forward
- After tax cash flow = Earnings after tax + __________ A sunk cost is one that has been incurred and it is not relevant to __________ decisions. Total Risk = Systematic Risk + __________ risk Systematic risk reflects exposure to __________ wide events, such as interest rate changes and business cycles, Expected return on risky asset = Risk free interest rate + __________ premium + Risk premium.arrow_forwardThe higher the firm's tax rate, the lower the firm's after-tax cost of debt and WACC will be (other things held constant.) TRUE Or False?arrow_forwardIn terms of tax policy, what do the following mean? a. Revenue neutrality. b. Sunset provision. c. Indexation.arrow_forward
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