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Swedish Wood Corp. currently has no debt. Its market capitalization is $700 million, and its average...

Swedish Wood Corp. currently has no debt. Its market capitalization is $700 million, and its average tax rate is 34%.

The company wants to borrow $245 million to repurchase shares. The debt will have an interest rate of 5.2% and will be kept constant forever.

Part 1: What is the annual interest tax shield (in $ million)?

Part 2: What is the present value of all future annual interest tax shields (in $ million)?

Part 3: What is the new value of the firm (in $ million)?

Part 4: What is the new market value of equity (in $ million)?

Part 5: What will be the debt/equity ratio after the restructuring?

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

NO ROUNDING CONDITIONS ARE MENTIONED, SO TAX SHIELD ROUNDED TO 4 DECIMALS,

DEBT EQUITY RATIO ROUNDED TO 4 DEDIMALS AND ALSO IN % TERMS, ROUNDED TO 2 DECIMALS

jeff jeffy answered 2 years ago
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