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 the firm makes interest payments of $1,000 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. To what percentage of the value of the debt is the difference in part (c) equal?

Expert Solution

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

jeff jeffy answered 2 years ago

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...

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...

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 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 25 %. Consider a firm that earns $ 1 comma...

Suppose the corporate tax rate is 25 %. Consider a firm that earns $ 1 comma 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 5 %. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the...

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 firm has basic earnings per share of $1.90. If the tax rate is 30%, which...

A firm has basic earnings per share of $1.90. If the tax rate is 30%, which of the following securities would be dilutive? (Circle the best answer.) a. Convertible 5% bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock. b. Convertible 6% bonds, issued at par, with each $1,000 bond convertible into 20 shares of common stock. c. Cumulative convertible 4%, $100 par, preferred stock, issued at par, with each preferred share convertible into...

Question