Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
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Textbook Question
Chapter 18.8, Problem 1CC
When a firm has pre-determined tax shields, how do we measure its net debt when calculating its unlevered cost of capital?
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Which of the following is CORRECT?
Select one:
a. When calculating the cost of debt, a company needs to adjust for taxes, because interest payments are deductible by the paying corporation.
b. When calculating the cost of preferred stock, companies must adjust for taxes, because dividends paid on preferred stock are deductible by the paying corporation.
c. Because of tax effects, an increase in the risk-free rate will have a greater effect on the after-tax cost of common stock as measured by the CAPM.
d. Higher flotation costs reduce investors' expected returns, and that leads to a reduction in a company's WACC.
e. All of the above are correct.
Which of the following is CORRECT?
Select one:
a. If the NPV of a project is negative, the IRR for the project must also be negative.
b. A project's MIRR can never exceed its IRR.
c. If a project with normal cash flows has an IRR less than WACC, the project must have a positive NPV.
d. If Project 1's IRR exceeds Project 2's IRR, then 1 must…
Why is it important to include the tax effect into cost of capital computations for firms with debt financing?
Multiple Choice
taxable income is reduced by the amount of the interest expense.
taxes are paid on interest but not on dividends.
firms pay taxes on the outstanding principal amount of the debt.
comparisons with equity financing would otherwise not be possible.
The average of a firms cost of equity and after tax cost of debt that is weighted based on the firms capital structure is called
Chapter 18 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
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%...
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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
- How does the WACC DCF methodology mechanically incorporate interest tax shields (select the best answer)? Group of answer choices By estimating free cash flows that incorporate the tax benefits of debt. By adding the tax benefits of interest payments to the value of the firm. By adding the PV of the interest tax shields to the value of the firm. By estimating a discount rate that incorporates the tax benefits of debt.arrow_forwardHow much in taxes would the target firmhave to pay on any gains it realizes?arrow_forwardHow would an increase in corporate taxes tend to affect an average firm’s capitalstructure? What about an increase in the personal tax rate?arrow_forward
- For a typical firm, assumes that all rates are after taxes and that the firm operates at its target capital structure. So cost of equity > after tax cost of debt > WACC. True Falsearrow_forwardUsing the adjusted present value model, under what assumptionsare the MM (with corporate taxes) results correct?arrow_forwardIt has been suggested that in a world with only corporate taxation the value of the firm = the value of all equity financed + the present value of tax shield on debt finance How far do existing capital structures of companies compare with the most appropriate structure according to the equation?arrow_forward
- How does our tax system influence the use of debt financing by corporations?arrow_forwardDiscuss why the after-tax cost of equity (common or preferred) does not have to be adjusted by the marginal income tax rate for the firm.arrow_forwardAccording to the M&M propositions WITH and WITHOUT taxes, should a financial manager spend time analysing a firm’s capital structure? What is the optimal capital structure with and without tax? Discuss.arrow_forward
- How can we determine Corporate Taxes?arrow_forwardWhich of the following is most correct about the cost of capital? The cost of debt reflects the interest rates on debt capital before taking into account the tax effects. Cost of capital is affected by the required rates of return of each of the source of capital, regardless of the capital structure. The capital asset pricing model is the most widely used model to estimate the cost of common equity. To minimize the cost of capital, firms should borrow more than their capacity because increasing the lower cost of debt yields the lowest cost of capital, thus, enhances shareholder value.arrow_forward
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