Suppose the corporate tax rate is 30%. Consider a firm that earns $1,500 before interest and...

Suppose the corporate tax rate is

30%.

Consider a firm that earns

$1,500

before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is

4%.

a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity?

b. Suppose instead the firm makes interest payments of

$1,100

per year. What is the value of equity? What is the value of debt?

c. What is the difference between the total value of the firm with leverage and without leverage?

d. The difference in

(c)

is equal to what percentage of the value of the debt?

Expert Solution

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

jeff jeffy answered 1 year ago

Suppose the corporate tax rate is 30%. Consider a firm that earns $1,500 in earnings before...

Suppose the corporate tax rate is 30%. Consider a firm that earns $1,500 in earnings before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 7%. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? b. Suppose instead...

Suppose the corporate tax rate is 40%. Consider a firm that earns $2,500 before interest and...

Suppose the corporate tax rate is 40%. Consider a firm that earns $2,500 before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 4%. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? b. Suppose instead the firm...

Suppose the corporate tax rate is 30 %30%. Consider a firm that earns $ 3 comma...

Suppose the corporate tax rate is 30 %30%. Consider a firm that earns $ 3 comma 000$3,000 in earnings before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 7 %7%. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the...

Suppose the corporate tax rate is 35%. Consider a firm that earns $2,000 in earnings before...

Suppose the corporate tax rate is 35%. Consider a firm that earns $2,000 in earnings before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 7%. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? b. Suppose instead...

Consider a S corporation. The corporation earns $2 per share before taxes. The corporate tax rate...

Consider a S corporation. The corporation earns $2 per share before taxes. The corporate tax rate is 35%, the tax rate on dividend income is 20%, and the personal income tax rate is set at 28%. What are the shareholder's earnings from the corporation after all corresponding taxes are paid?

A C corporation earns $12.82 per share before taxes. The corporate tax rate is 39%, the...

A C corporation earns $12.82 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $6.66 dividend?

A C corporation earns $4.30 per share before taxes. The corporate tax rate is 35%, the...

A C corporation earns $4.30 per share before taxes. The corporate tax rate is 35%, the personal tax rate on dividends is 20%, and the personal tax rate on non-dividend income is 39%. What is the total amount of taxes paid if the company pays a $3.00 dividend?

A C corporation earns $ 8.00 per share before taxes. The corporate tax rate is 39%,...

A C corporation earns $ 8.00 per share before taxes. The corporate tax rate is 39%, the personal tax rate on dividends is 15%, and the personal tax rate on non-dividend income is 36%. What is the total amount of taxes paid if the company pays a $ 4 dividend? A. $4.46 B. $3.72 C. $2.98 D. $5.21

A. The (before-tax cost of debt/after-tax cost of debt) is the interest rate that a firm...

A. The (before-tax cost of debt/after-tax cost of debt) is the interest rate that a firm pays on any new debt financing. B. Perpetualcold Refrigeration Company (PRC) can borrow funds at an interest rate of 11.10% for a period of four years. Its marginal federal-plus-state tax rate is 45%. PRC’s after-tax cost of debt is (6.11%/7.03%/5.80%/6.72%) (rounded to two decimal places). C. At the present time, Perpetualcold Refrigeration Company (PRC) has 10-year noncallable bonds with a face value of $1,000...

A firm reports Net Income of $21,000 with a tax rate of 30%. It pays interest...

A firm reports Net Income of $21,000 with a tax rate of 30%. It pays interest in the amount of $10,000. Its net profit margin is 7% and its costs are $160,000, not including depreciation. Calculate depreciation. Calculate the operating cash flow. The firm’s last balance sheet showed net fixed assets of $500,000 and the current balance sheets shows net fixed assets of $500,000. What was the company’s net capital spending this year?

Question