There are two firms: Firm U and Firm L. Both firms have $100M total assets and $15M EBIT (eamings before interest and taxes). Firm U is an unleveraged firm without debt. Firm L is a leveraged firm with 50% of debt and 50% of common equity. The pre-tax cost of debt for Firm L is 8%. Both firms have 25% corporate tax rate. Calculate the return on equity (ROE) for firm U. O 9.60% 11.25 % O 16.50% O 18.20 % QUESTION 40 Based on the information from Question 39, what's the return on equity (ROE) for firm L O 9.60% O 11.25% 16.50% O 18.20 % QUESTION 41

There are two firms: Firm U and Firm L. Both firms have $100M total assets and $15M EBIT (eamings before interest and taxes). Firm U is an unleveraged firm without debt. Firm L is a leveraged firm with 50% of debt and 50% of common equity. The pre-tax cost of debt for Firm L is 8%. Both firms have 25% corporate tax rate. Calculate the return on equity (ROE) for firm U. O 9.60% 11.25 % O 16.50% O 18.20 % QUESTION 40 Based on the information from Question 39, what's the return on equity (ROE) for firm L O 9.60% O 11.25% 16.50% O 18.20 % QUESTION 41

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 2P

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You are given the financial information for the Unic Company: Earnings Before Interest and Tax (EBIT) = $126.58 Corporate tax rate (TC) = 0.21 Debt (D) = $500 Unlevered cost of capital (RU) = 0.20 The cost of debt capital is 10 percent. Question: Determine the value of Unic Company equity? Determine the cost of equity capital for Unic Company? Determine the WACC for Unic Company?
An all equity firm has a return on assets (ROA) of 14.20 percent. The firm makes the decision to replace 30% of its equity with debt that has a before-tax cost of 8 percent (the firm's tax rate is 40 percent). Calculate the firm's new ROE after the debt has been issued and equity has been repurchased (hint: leverage effect and tax shield effect). O 17.37% O 17.66% 17.94% 18.23% O 18.51%
Referring to table below, calculate the market value of firm L (without a corporate income tax) if the equity amount in its capital structure decreases to $5,000 and the debt amount increases to $5,000. At this capital structure, the cost of equity is 15 percent. Round your answer to the nearest dollar. Firm U Firm L Net operating income (EBIT) $ 1,000 $ 1,000 Less: Interest payments to debt holders, I - 100 Income available to stockholders (dividends), D $ 1,000 $ 900 Total income available to security holders, I + D $ 1,000 $ 1,000 Required rate of return on debt, kd - 5 % Market value of debt, B = I/kd - $ 2,000 Required rate of return on equity,ke 10 % 11.25 % Market value of equity, E = D/ke $ 10,000 $ 8,000 Market value of firm, E + B $ 10,000 $ 10,000 $
Bulldogs Inc., which is funded by debt and ordinary equity, has a debt to equity ratio of 100%. The weighted average cost of capital of the firm is 20%. Using the capital asset pricing model, the cost of equity is determined to be 30%. If the before-tax cost of debt is 16%, what is the applicable tax rate of Bulldogs Inc.? a. 37.50% b. 35.70% c. 25.55% d. 25.80%
33. There are two firms: Firm U and Firm L. Both firms have $100M total assets and $16M EBIT (earnings before interest and taxes). Firm U is an unleveraged firm without debt. Firm L is a leveraged firm with 50% of debt and 50% of common equity. The pre-tax cost of debt for Firm L is 8%. Both firms have 30% corporate tax rate. Calculate the return on equity (ROE) for firm U 9.6% 11.2% 12.0% 15.2% 34. Based on the information from Question 33, what’s the return on equity (ROE) for firm L 9.6% 13.2% 16.8% 19.2% Question 35 Based on the information from Question 33, what’s the difference of the total dollars paid to all investors in Firm L and Firm U $1.0 million $4.8 million $5.8 million $1.2 million
You have the following data for your company. Market Value of Equity: $520 Book Value of Debt: $130 Required rate of return on equity: 12% Required rate of return on debt (pre-tax): 7% Corporate tax rate: 25% The company's debt is assumed to be is reasonably safe, so the book value of debt is a reasonably approximation for the market value of debt. What is the weighted average cost of capital for this company?
Intro Munding Corp. has debt with a market value of $23 million and equity with a market value of $57 million. Its pre-tax cost of debt is 5% and its cost of equity is 11%. The firm's marginal tax rate is 21%. Part 1 What is the company's weighted average cost of capital? 3+ decimals Submit
Calculate the cost of equity: Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table. Table 1: Information of the firms Unlevered firm Levered firm EBIT 10,000 10,000 Interest 0 3,200 Taxable income 10,000 6,800 Tax (tax rate: 34%) 3,400 2,312 Net income 6,600 4,488 CFFA 0 -3,200 Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5 Fill in the blanks What is the present value of the tax shield? Cost of Capital = (10% x 0.5) + (8% x 0.5 x (1-0.34) = 7.64% PV of Tax Shield = (3,200 x 0.34) / (1+0.0764) = 1,010.78 What is the size of debt? Interest / Cost of Debt (3,200 / 8%) = 40,000 Calculate the following values:a) Value of Unlevered Firm 10,000 x (1-34%) / 10% 6,600 / 10% = 66,000 b) Value of the Levered Firm 66,000 + 34% x 40,000 66,000 + 13,600 = 79,600 c) Equity Value…
Find the WACC given the following information: A firm has a cost of equity of 8% and cost of debt of 6.5%. The debt - toequity ratio is 0.75. The tax rate is 15%.
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Take It All Away has a cost of equity of 10.63 percent, a pretax cost of debt of 5.33 percent, and a tax rate of 22 percent. The company's capital structure consists of 71 percent debt on a book value basis, but debt is 31 percent of the company's value on a market value basis. What is the company's WACC? Multiple Choice O O O 9.59% 862% 9.30% 8.99%
OSA Company has the following values of interest-bearing debt and common equity capital: Financing Source Dollar Amount Interest Rate Cost of CapitalShort-term loan $200,000 12%Long-term loan $200,000 14%Equity capital $600,000 22% OSI is in the 30 percent average tax bracket. A. Calculate the after-tax weighted average cost of capital for OSI. B. Given that OSI's EBIT is $300,000, compute its EVA. C. Did the venture build or destroy value? Explain. Make sure to show all the formulas and calculations in addition to any assumption needed.