Question

PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $ 18 million, $ 23 million, or $ 28 million. Its corporate tax rate is 30 %, and investors pay a 25 % tax rate on income from equity and a 35 % tax rate on interest income.

a. What is the effective tax advantage of debt if PMF has interest expenses of $14 million this coming year?

b. What is the effective tax advantage of debt for interest expenses in excess of $ 28 million? (Ignore carryforwards).

c. What is the expected effective tax advantage of debt for interest expenses between $ 18 million and $ 23 million? (Ignore carryforwards).

d. What level of interest expense provides PMF with the greatest tax benefit

Answer #1

Effective tax advantage = 1- [ (1- corporate tax) (1- tax on equity) / (1 - interest rate tax)]

a. Tax advantage =1- [ (1- 30%) (1- 25%) / (1 - 35%)]

= 19.2%

b. If interest expenses in excess of $ 28 million , then net income is $0, then corporate tax is 0%

Tax advantage =1- [ (1- 0%) (1- 25%) / (1 - 35%)]

= - 15.4%

c. Probability of corporate tax rate = 2/3* 30% = 20% [ 2/3 is probability since out of 3 times, 2 instances the company will have a positive net income]

Tax advantage =1- [ (1- 20%) (1- 25%) / (1 - 35%)]

= 7.7%

d. Option ,if PMF has interest expenses of $14 million this coming year.

Pelamed Pharmaceuticals has EBIT of $ 110 million in 2012. In
addition, Pelamed has interest expenses of $47
million and a corporate tax rate of 30 %
a. What is Pelamed's 2012 net income?
b. What is the total of Pelamed's 2012 net income plus
interest payments?
c. If Pelamed had no interest expenses, what would its 2012 net
income be? How does it compare to your answer in
part (b)?
d. What is the amount of Pelamed's interest tax...

Pelamed Pharmaceuticals has EBIT of
$ 379$379
million in 2011. In addition, Pelamed has interest expenses
of
$ 97$97
million, and a corporate tax rate of
30 %30%.
a. What is Pelamed's 2011 net income?
b. What is the total of Pelamed's 2011 net
income plus interest payments?
c. If Pelamed had no interest expenses, what
would its 2011 net income be? How does it compare to your answer
in
part
(b)?
d. What is the amount of Pelamed's interest...

Pelamed Pharmaceuticals has EBIT of
$446
million in 2012. In addition, Pelamed has interest expenses
of
$114
million and a corporate tax rate of
35%.
a. What is Pelamed's 2012 net income?
b. What is the total of Pelamed's 2012 net income plus
interest payments?
c. If Pelamed had no interest expenses, what would its 2012 net
income be? How does it compare to your answer in
part
(b)?
d. What is the amount of Pelamed's interest tax shield in...

Pelamed Pharmaceuticals had EBIT of
$270
million in
2018.
In addition, Pelamed had interest expenses of
$68
million and a corporate tax rate of
21%.
a. What is Pelamed's
2018
net income?
b. What is the total of Pelamed's
2018
net income plus interest payments?
c. If Pelamed had no interest expenses, what would have been
its
2018
net income? How does it compare to your answer in part
(a)?
d. What is the amount of Pelamed's interest tax shield...

Pelamed Pharmaceuticals had EBIT of $171 million in 2010. In
addition, Pelamed had interest expenses of $62 million and a
corporate tax rate of 35%. a. What is Pelamed's 2010 net income? b.
What is the total of Pelamed's 2010 net income plus interest
payments? c. If Pelamed had no interest expenses, what would have
been its 2010 net income? How does it compare to your answer in
part (a)? d. What is the amount of Pelamed's interest tax shield...

Pelamed Pharmaceuticals had EBIT of $ 142 million in 2018. In
addition, Pelamed had interest expenses of $ 64 million and a
corporate tax rate of 21 %.
a. What is Pelamed's 2018 net income?
b. What is the total of Pelamed's 2018 net income plus
interest payments?
c. If Pelamed had no interest expenses, what would have been
its 2018 net income? How does it compare to your answer in part
(a)?
d. What is the amount of Pelamed's...

Pelamed Pharmaceuticals had EBIT of $ 208 million in 2018. In
addition, Pelamed had interest expenses of $ 57 million and a
corporate tax rate of 22 %.
a. What is Pelamed's 2018 net income?
The 2018 net income is $__ million. (Round to the nearest
integer.)
b. What is the total of Pelamed's 2018 net income plus
interest payments?
The total of Pelamed's 2018 net income plus interest payments
is $____.
c. If Pelamed had no interest expenses, what...

The Hatfield Corporation is a zero growth firm with an expected
EBIT of $250,000 and a corporate tax rate of 40 percent. Hatfield
uses $1 million of debt financing, and the cost of equity to an
unlevered firm in the same risk class is 15 percent.
Suppose the personal tax rates on Hatfield’s investors are 30
percent on debt (interest) income and 20 percent (on average) on
income from stocks. Suppose in a world with personal tax, the cost
of...

Colt Systems will have EBIT this coming year of $18 million. It
will also spend $7 million on total capital expenditures and
increases in net working capital and have $4 million in
depreciation expenses. Colt is currently an all-equity firm with a
corporate tax rate of 30% and a cost of capital of 11%. If Colt’s
free cash flows are expected to grow by 9.5% per year, what is the
market value of its equity today?
A.
$1,000 million
B....

is considering issuing $10,000,000 worth of perpetual bonds
yielding $600,000 interest per year. ABC currently has no debt
outstanding and will use the bond proceeds to repurchase equity.
ABC has 100% dividend payout ratio and EBIT is $2,000,000 per year
forever. Corporate tax rate is 30%.
If the personal tax rate is 28%, which plan (all equity or debt
+ equity) offers the investors the highest cash flows? Why?
If the shareholders require a 15% return before personal taxes,
what...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 10 minutes ago

asked 11 minutes ago

asked 21 minutes ago

asked 24 minutes ago

asked 24 minutes ago

asked 42 minutes ago

asked 46 minutes ago

asked 49 minutes ago

asked 56 minutes ago

asked 57 minutes ago

asked 1 hour ago

asked 1 hour ago