A company is all-equity-financed with 42,000 shares. It now proposes to issue $170,000 of debt at...

A company is all-equity-financed with 42,000 shares. It now proposes to issue $170,000 of debt at an interest rate of 10% and to use the proceeds to repurchase 17,000 shares. Suppose that the corporate tax rate is 35%. Calculate the increase in cash flow in the combined after-tax income of its debtholders and equityholders if EBIT is $92,000?

Expert Solution

jeff jeffy answered 1 year ago

River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $250,000 of debt at...

River Cruises is all-equity-financed with 100,000 shares. It now proposes to issue $250,000 of debt at an interest rate of 10% and to use the proceeds to repurchase 25,000 shares. Suppose that the corporate tax rate is 21%. Calculate the dollar increase in the combined after-tax income of its debt-holders and equity-holders if profits before interest are: (Do not round intermediate calculations.) a. 75,000 b. 100,000 c. 175,000 what is the increase in cash for for a b and c

River Cruises is all-equity-financed with 54,000 shares. It now proposes to issue $290,000 of debt at...

River Cruises is all-equity-financed with 54,000 shares. It now proposes to issue $290,000 of debt at an interest rate of 10% and to use the proceeds to repurchase 29,000 shares. Suppose that the corporate tax rate is 35%. Calculate the dollar increase in the combined after-tax income of its debtholders and equityholders if profits before interest are: (Do not round intermediate calculations.) Increase in Cash Flow a. $79,000 b. $104,000 c. $179,000

Now imagine that Tiger Pros is 60% financed with equity and 40% financed with debt. Cost...

Now imagine that Tiger Pros is 60% financed with equity and 40% financed with debt. Cost of equity is 16.5% and after-tax cost of debt is 11%. It has the same perpetual EBIT of $500 a year but has a $120 perpetual interest expense. The firm is subject to a 21% tax rate. What is the market value of Tiger Pros?

16. Lowell Corp. is an all-equity firm with $820,000. It now wants to issue debt and...

16. Lowell Corp. is an all-equity firm with $820,000. It now wants to issue debt and raise the debt ratio to 0.40 from 0.0 without changing total assets. It plans to use the proceeds of the debt issue to retire some equity using a share repurchase. How much cash should Lowell borrow? a. $228,000 b. $288,000 c. $328,000 d. $388,000 e. $492,000 17. Nashua Inc.'s debt ratio is .25. That is, for every $100 of total assets, it has borrowed...

XYZ Ltd is an all equity company financed by 210,000 ordinary shares which have a market...

XYZ Ltd is an all equity company financed by 210,000 ordinary shares which have a market value of $2.50 per share. The company has earnings before interest and tax (EBIT) of $120,000 and a tax rate of 30%. i. What is the current market value of the company? ii. What is the current cost of ordinary equity (return on equity)? If the company raises $200,000 of long term debt at a cost of 9% and uses the proceeds to retire...

Q1) Zemma Corp: is all equity financed with 20 million shares outstanding. Their shares trade at...

Q1) Zemma Corp: is all equity financed with 20 million shares outstanding. Their shares trade at $15 per share. Now Zemma Corp will change its capital structure by issuing 100 million in debt. The 100 raised by the issue will be used to buyback shares at a fair price. Assume that debt will be permanent debt and that the appropriate cost of debt will be 5%. The current tax rate is 40%. Before the transaction, what is the market value...

Zemma Corp: is all equity financed with 20 million shares outstanding. Their shares trade at $15...

Zemma Corp: is all equity financed with 20 million shares outstanding. Their shares trade at $15 per share. Now Zemma Corp will change its capital structure by issuing 100 million in debt. The 100 raised by the issue will be used to buyback shares at a fair price. Assume that debt will be permanent debt and that the appropriate cost of debt will be 5%. The current tax rate is 40%. A. Before the transaction, what is the market value...

i) A company is financed 60% by debt and 40% by equity. The pre-tax cost of...

i) A company is financed 60% by debt and 40% by equity. The pre-tax cost of debt is currently 10%. The Finance Director has stated that the weighted average cost of capital for the company is 9.6%. What is the cost of equity? Assume the tax rate is 40%. a) 11.4% b) 9.8% c) 12% d) 15% ii) Ashley Ardern has been researching a vaccine for Covid-19. The cost of the research efforts has already amounted to $500,000. If Ashley...

You own 1,500 shares of stock in a company that is 25% debt financed. The stock...

You own 1,500 shares of stock in a company that is 25% debt financed. The stock price is $50 per share. You want to use homemade leverage to unlever your shares to replicate an all-equity capital structure. What amount will you borrow or lend? Do not round intermediate calculations. Round the final answer to 2 decimal places. Omit any commas and the $ sign in your response. For example, an answer of $1,000.50 should be entered as 1000.50.

For a levered firm, firm’s assets are financed by equity and debt. That is, ?? =...

For a levered firm, firm’s assets are financed by equity and debt. That is, ?? = ?? + ?? , where ?? ,?? & ?? represents asset value, debt value and equity value at time ?. Suppose the firm makes no dividend payment and has a zero-coupon debt maturing at time ?. At maturity, if the value of the company asset is greater than the maturity value of the debt (?? > ??), the company will simply pay off the...

Question