Question

In: Finance

A firm with no debt financing has a firm value of $50 million. It has a...

A firm with no debt financing has a firm value of $50 million. It has a corporate marginal tax rate of 35 percent. The firm’s investors are estimated to have marginal tax rates of 22 percent on interest income and a weighted average of 17 percent on stock income. The firm is planning to change its capital structure by issuing $10 million in debt, and repurchasing $10 million of common stock. Based on the information above, answer next 2 questions. (SHOW CALCULATION)

a. According to MM with corporate taxes, what is the value of the levered firm?

b. According to Miller with corporate and personal taxes, what is the value of the levered firm?

Solutions

Expert Solution

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

if a firm has a total debt ratio = .50, what is the value of the...
if a firm has a total debt ratio = .50, what is the value of the equity multiplier?
(a) Kim Corp. has $50 million in excess cash and no debt. The firm expects to...
(a) Kim Corp. has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends. Kim Corp.’s cost of capital is 10% and there are 10 million shares outstanding. Kim Corp.'s board decided to use the entire $50 million to repurchase shares. Assume that you own 2,500 shares of Kim Corp. stock and that...
Corporation A has $50 million in excess cash and no debt. The firm expects to generate...
Corporation A has $50 million in excess cash and no debt. The firm expects to generate additional free cash flows of $40 million per year in subsequent years and will pay out these future free cash flows as regular dividends.  Corporation A's cost of capital is 10% and there are 10 million shares outstanding.  Corporation A's board decided to use the entire $50 million to repurchase shares. Assume that you own 2,500 shares of Corporation A stock and that Corporation A uses...
A firm uses INR 50 million of debt, INR 15 million of short-term debt, and INR...
A firm uses INR 50 million of debt, INR 15 million of short-term debt, and INR 90 million of common equity to finance its assets. If the before-tax cost of debt is 10%, after-tax cost of short-term debt is 8%, and the cost of common equity is 16%, calculate the weighted average cost of capital for the firm assuming a tax rate of 20%.
Currently the firm has total market value of debt $20 million and total market value of...
Currently the firm has total market value of debt $20 million and total market value of equity $60 million. This capital structure is considered optimal by the management. The optimal capital budget for new investment for the coming period is determined to be $15 million. The total net income is estimated to be $20 million. The firm has 5 million common shares outstanding. The most recent dividend per share is $1 and the management intends to maintain it for the...
Carpetto Technologies Inc. has a market capitalisation of $50 million and $50 million in outstanding debt....
Carpetto Technologies Inc. has a market capitalisation of $50 million and $50 million in outstanding debt. Its corporate tax rate is 31%. 1.The beta of Carpetto Technologies Inc. is 1.7, the risk-free rate is 8.5%, and the return on market is 13.5%, what will be Carpetto’s cost of common equity using the Capital Asset Pricing Model (CAPM) approach? 2.Suppose Carpetto’s debt of cost of capital is 10.5%. What is Carpetto’s after tax debt of cost of capital?                                                                     3.What is unlevered...
Carpetto Technologies Inc. has a market capitalisation of $50 million and $50 million in outstanding debt....
Carpetto Technologies Inc. has a market capitalisation of $50 million and $50 million in outstanding debt. Its corporate tax rate is 31%. The beta of Carpetto Technologies Inc. is 1.7, the risk-free rate is 8.5%, and the return on market is 13.5%, what will be Carpetto’s cost of common equity using the Capital Asset Pricing Model (CAPM) approach? Suppose Carpetto’s debt of cost of capital is 10.5%. What is Carpetto’s after tax debt of cost of capital? What is unlevered...
A company has an optimal capital structure of 35% debt financing, 15% preferred stock financing, 50%...
A company has an optimal capital structure of 35% debt financing, 15% preferred stock financing, 50%     common equity financing. The tax rate is 25%, the preferred stock dividend is $2 per share, next period’s common stock dividend is $1 per share and is expected to grow by 5% in future years, the price of the company’s common stock is $10, the price of the company’s preferred stock is $25, the bond coupon rate is 4%. Assume that retained earnings...
A company has an optimal capital structure of 35% debt financing, 15% preferred stock financing, 50%...
A company has an optimal capital structure of 35% debt financing, 15% preferred stock financing, 50%     common equity financing. The tax rate is 25%, the preferred stock dividend is $2 per share, next period’s     common stock dividend is $1 per share and is expected to grow by 5% in future years, the price of the     company’s common stock is $10, the price of the company’s preferred stock is $25, the bond coupon rate     is 4%. Assume that retained earnings is...
Firm A has a value of $500 million and Firm B has a value of $300...
Firm A has a value of $500 million and Firm B has a value of $300 million. Firm A has 1000 shares outstanding, and firm B has 1000 shares outstanding. Suppose that the merger would increase cash flows of the combined firm by $5 million in perpetuity. Assuming the cost of capital for the firm is 10% Suppose that instead of paying cash, Firm A acquires B by offering two (new) shares of A for every three shares of B....
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT