Question

Markum Enterprises is considering permanently adding an additional

$187

million of debt to its capital structure. Markum's corporate tax rate is

21%.

a. Absent personal taxes, what is the value of the interest tax shield from the new debt?

b. If investors pay a tax rate of

37%

on interest income, and a tax rate of

20%

on income from dividends and capital gains, what is the value of the interest tax shield from the new debt?

a. Absent personal taxes, what is the value of the interest tax shield from the new debt?

In the absence of personal taxes, the value of interest tax shield from new debt should be

$39.2739.27

million.

(Round to two decimal places.)b. If investors pay a tax rate of

37%

on interest income, and a tax rate of

20%

on income from dividends and capital gains, what is the value of the interest tax shield from the new debt?If investors pay a tax rate of

37%

on interest income, and a tax rate of

20%

on income from dividends and capital gains, the value of the interest tax shield from new debt should be

$nothing

million. (Round to two decimal places.)

Answer #1

Facebook, Inc. had no debt on its balance sheet in 2014, but
paid $2 billion in taxes. Suppose Facebook were to issue
sufficient debt to reduce its taxes by $270 million per year
permanently. Assume Facebook's marginal corporate tax rate is 37 %
and its borrowing cost is 4.5 %.
a. If Facebook's investors do not pay personal taxes (because
they hold their Facebook stock in tax-free retirement accounts),
how much value would be created (what is the value of...

Fortune Enterprises is an all-equity firm that is considering
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The firm will use the proceeds of the bond sale to repurchase
equity. Fortune distributes all earnings available to stockholders
immediately as dividends. The firm will generate $3 million of
earnings before interest and taxes (EBIT) every year into
perpetuity. Fortune is subject to a corporate tax rate of 40%.
Suppose the personal tax rate on interest income is 55%,...

6. Fortune Enterprises is an all-equity firm that is considering
issuing $13.5 million of perpetual debt. The interest rate is 10%.
The firm will use the proceeds of the bond sale to repurchase
equity. Fortune distributes all earnings available to stockholders
immediately as dividends. The firm will generate $3 million of
earnings before interest and taxes (EBIT) every year into
perpetuity. Fortune is subject to a corporate tax rate of 40%.
Suppose the personal tax rate on interest income is...

27. Now that your firm has matured, you are considering adding
debt to your capital structure for the first time. Your all-equity
firm has a market value of $21 million and you are considering
issuing $2.1 million in debt with an interest rate of 9% and
using it to repurchase shares. You pay a corporate tax rate of
25%. Assume taxes are the only imperfection and the debt is
expected to be permanent.
a. What will be the total value...

You are a consultant who has been hired to evaluate a new
product line for Markum Enterprises. The upfront investment
required to launch the product line is 10 million. The product will
generate free cash flow of .73 million the first year, and this
free cash flow is expected to grow at a rate of 5% per year. Markum
has an equity cost of capital of 11.5%, a debt cost of capital of
5.16%, and a tax rate of 42%....

You are a consultant who has been hired to evaluate a new
product line for Markum Enterprises. The upfront investment
required to launch the product line is
$15 million. The product will generate free cash flow of $0.77
million the first year, and this free cash flow is expected to
grow at a rate of
4% per year. Markum has an equity cost of capital of 11.7%, a
debt cost of capital of 9.28%, and a tax rate of 38%....

You are a consultant who has been hired to evaluate a new
product line for Markum Enterprises. The upfront investment
required to launch the product line is $5 million. The product will
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this free cash flow is expected to grow at a rate of 3% per year.
Markum has an equity cost of capital of 11.4%, a debt cost of
capital of 5.02 %, and a...

You are a consultant who has been hired to evaluate a new
product line for Markum Enterprises. The upfront investment
required to launch the product line is $ 7 million. The product
will generate free cash flow of $ 0.70 million the first year, and
this free cash flow is expected to grow at a rate of 5 % per year.
Markum has an equity cost of capital of 11.2 %, a debt cost of
capital of 7.18 %, and...

Assume an unlevered company chooses to alter its capital
structure by adding debt and using the debt proceeds to reduce
shares outstanding as to leave total invested capital unchanged.
Absent any other changes, the company's earnings before interest
and taxes (EBIT) can be expected to:
Group of answer choices
increase.
decrease.
remain unchanged.
Assume an unlevered company chooses to alter its capital
structure by adding debt and using the debt proceeds to reduce
shares outstanding as to leave total invested...

Braxton Enterprises currently has debt outstanding of $ 50
million and an interest rate of 8 %. Braxton plans to reduce its
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for the next five years. If Braxton's marginal corporate tax rate
is 40 %, what is the interest tax shield from Braxton's debt in
each of the next five years?
The interest tax shield in year one is $____ million. (Round to
three decimal...

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