Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
9th Edition
ISBN: 9781259277214
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Bradford D Jordan Professor
Publisher: McGraw-Hill Education
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 13, Problem 14QP
Summary Introduction
To compute: The value of the firm if the firm sells $19.4 million in debt, ignoring the taxes and its total value if it includes the rate of corporate tax at 40%.
Introduction:
M&M proposition I is a proposition where the firm’s value is independent of the capital structure of the firm. M&M proposition II is a proposition where a company’s equity cost is a linear function that is positive of the capital structure of the firm.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
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
Byrd Enterprises has no debt. Its current total value is $50.2 million. Assume debt proceeds are used to repurchase equity.
Ignoring taxes, what will the company’s value be if it sells $20 million in debt?
Note: 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.
Suppose now that the company’s tax rate is 21 percent. What will its overall value be if it sells $20 million in debt?
Note: 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.
Bird Enterprises has no debt. Its current total value is $48.4 million. Assume the company sells $19.1 million in debt.
a.
Ignoring taxes, what is the debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
b.
Assume the company’s tax rate is 22 percent. What is the debt-equity ratio? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Chapter 13 Solutions
Essentials of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 13.1 - What is the relationship between the WACC and the...Ch. 13.1 - Prob. 13.1BCQCh. 13.2 - Prob. 13.2ACQCh. 13.2 - Prob. 13.2BCQCh. 13.2 - Prob. 13.2CCQCh. 13.3 - What does MM Proposition I state?Ch. 13.3 - Prob. 13.3BCQCh. 13.3 - Prob. 13.3CCQCh. 13.4 - Prob. 13.4ACQCh. 13.4 - Prob. 13.4BCQ
Ch. 13.5 - Prob. 13.5ACQCh. 13.5 - Prob. 13.5BCQCh. 13.6 - Can you describe the tradeoff that defines the...Ch. 13.6 - What are the important factors in making capital...Ch. 13.7 - Prob. 13.7ACQCh. 13.7 - Prob. 13.7BCQCh. 13.8 - What is the APR (in connection with bankruptcy...Ch. 13.8 - What is the difference between liquidation and...Ch. 13 - Prob. 13.3CCh. 13 - Prob. 13.4CCh. 13 - Prob. 13.5CCh. 13 - Section 13.6The static theory of capital structure...Ch. 13 - Prob. 13.7CCh. 13 - Business Risk versus Financial Risk. Explain what...Ch. 13 - Prob. 2CTCRCh. 13 - Prob. 3CTCRCh. 13 - Prob. 4CTCRCh. 13 - Prob. 5CTCRCh. 13 - Prob. 6CTCRCh. 13 - Prob. 7CTCRCh. 13 - Prob. 8CTCRCh. 13 - Prob. 9CTCRCh. 13 - Prob. 10CTCRCh. 13 - EBIT and Leverage. Kaelea, Inc., has no debt...Ch. 13 - EBIT, Taxes, and Leverage. Repeat parts (a) and...Ch. 13 - Prob. 3QPCh. 13 - Break-Even EBIT. Kyle Corporation is comparing two...Ch. 13 - Prob. 5QPCh. 13 - Prob. 6QPCh. 13 - Prob. 7QPCh. 13 - Prob. 8QPCh. 13 - Homemade Leverage. Lydie Enterprises is...Ch. 13 - Calculating WACC. Crosby Industries has a...Ch. 13 - Calculating WACC. Malkin Corp. has no debt but can...Ch. 13 - Prob. 12QPCh. 13 - Prob. 13QPCh. 13 - Prob. 14QPCh. 13 - MM. In the previous question, what is the...Ch. 13 - Prob. 16QPCh. 13 - Prob. 17QPCh. 13 - Prob. 18QPCh. 13 - Prob. 19QPCh. 13 - Business and Financial Risk. Assume a firms debt...Ch. 13 - Prob. 1CCCh. 13 - Prob. 2CCCh. 13 - Stephenson Real Estate Recapitalization Stephenson...Ch. 13 - Prob. 4CCCh. 13 - Prob. 5CC
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
- (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.arrow_forwardHorford Co. has no debt. Its cost of capital is 10 percent. Suppose the company converts to a debt-equity ratio of 1. The interest rate on the debt is 7.1 percent. Ignore taxes for this problem. a.What is the company’s new cost of equity? b.What is its new WACC?arrow_forward93. Marcos & Sons has no debt. Its current total value is $58 million. What will the company's value be if it sells $21 million in debt and has a tax rate of 34 percent? Assume debt proceeds are used to repurchase equity.arrow_forward
- Byrd Enterprises has no debt. Its current total value is $47.2 million. Assume the company sells $18.5 million in debt. Ignoring taxes, what is the debt-equity ratio? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16. Assume the company’s tax rate is 21 percent. What is the debt-equity ratio? Note: Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.arrow_forward4. North Inc has a perpetual expected EBIT of $200. The interest rate on debt is 12%. Assume that there are no taxes. a. what is the value of North Inc if the debt/equity ratio is .25 and its weighted average cost of capital is 16%? What's the value of North's equity? What is the value of North's debt? What is the firm's cost of equity? b. Suppose the corporate tax is 30% and North has $400 in debt outstanding. If the unlevered cost is 20%, what's the value of North? What is the value of the firm's equity? What is the Wacc?arrow_forward1. Soda Fizz has debt outstanding that has a market value of $3 million. The company's stock has a book value of $2 million and a market value of $6 million. What are the weights in SodaFizz's capital structure? 2. The yield to maturity on Soda Fizz's debt is 7.2%. If the company's marginal tax rate is 21%, what is Soda Fizz's effective cost of debt? 3. SodaFizz paid a dividend of $2 per share last year; its dividend has been growing at a rate of 2% per year, and that growth rate is expected to continue into the future. The stock of SodaFizz is currently trading at $19.50 per share. According to the constant dividend growth model, what is the cost of equity capital for Soda Fizz? 5. Given the answers to Problems 1, 2, and 3, what is SodaFizz's WACC when the constant dividend growth model is used to calculate its equity cost of capital?arrow_forward
- 4. Binford Tools has an expected perpetual EBITDA equal to $67k. Its tax rate is 35%. Binford has $139k in debt at a cost of 6.85%. The unlevered capital cost is 10.25%. What is Binford's total value assuming interest is tax deductible?arrow_forwardMarcus Inc., a manufacturing firm with no debt outstanding and a market value of $100 million is considering borrowing $ 40 million and buying back stock. Assuming that the interest rate on the debt is 9% and that the firm faces a tax rate of 21%, answer the following question: Estimate the present value of all future interest tax savings, assuming that the debt change is permanent. Group of answer choices a. 21m b. 8.4m c. 0.756m d. 1.89marrow_forwardAssume zero corporate tax rate. Acorn Industries owns assets that have 80% probability of having market value $50 million in one year and 20% probability of having market value $20 million in one year. The risk free rate is 4% and Acorn's assets have cost of capital 10%. (a) If Acorn is unlevered, what is the value of Acorn's equity? (b) What is the expected return on equity? (c) What is the volatility of the equity return? (d) What is the WACC?arrow_forward
- Horford Co. has no debt. Its cost of capital is 9.5 percent. Suppose the company converts to a debt-equity ratio of 1. The interest rate on the debt is 6.6 percent. Ignore taxes for this problem. a. What is the company’s new cost of equity? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)b. What is its new WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.)arrow_forwardGarcia Company has no debt. Its cost of capital is 11.2 percent. Suppose the company converts to a debt-equity ratio of 1. The interest rate on the debt is 8.3 percent. Ignore taxes for this problem. e. What is the company's new cost of equity? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. b. What is its new WACC? Note: Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16. a. Cost of equity b. WACC % %arrow_forwardAn all equity firm announces that it is going to borrow $11 million in debt and then keep that debt at a constant value relative to the overall value of the company. What would be the appropriate discount rate for the expected interest tax shields generated by this additional debt? A. Required return on debt B. Required return on equity C. Required return on Assets D. WACCarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
How To Analyze an Income Statement; Author: Daniel Pronk;https://www.youtube.com/watch?v=uVHGgSXtQmE;License: Standard Youtube License