Question

Summit Builders has a market debt-equity ratio of

0.650.65

and a corporate tax rate of

35 %35%,

and it pays

7 %7%

interest on its debt. The interest tax shield from its debt lowers Summit's WACC by what amount?

Answer #1

**Solution:**

As per the information given in the question we have

Debt equity ratio = 0.65

This implies for every Dollar of equity there is $ 0.65 of debt

Thus the percentage of debt in the Weighted average cost of capital is

= debt / ( debt + equity )

= 0.65 / ( 1 + 0.65 )

= 0.65 /1.65 = 0.3939 = 39.39 %

As per the information given in the question we have

Interest Rate on Debt = 7 % ; Corporate Tax rate = 35 % = 0.35 ; Percentage of debt in WACC = 0.3939

Thus the Amount by which the Interest tax shield from debt lowers its WACC is

= Interest Rate on Debt * Corporate Tax rate * Percentage of debt in WACC

= 7 % * 0.35 * 0.3939

= 0.9651 % ( when rounded off to four decimal places )

=0.97 % ( when rounded off to two decimal places )

**Thus interest tax shield from its debt lowers Summit's
WACC by 0.97 %**

Summit Builders has a market debt-equity ratio of 1.70, a
corporate tax rate of 40 %, and pays 8 % interest on its debt. By
what amount does the interest tax shield from its debt lower
Summit's WACC?

Restex has a debt-equity ratio of 0.99, an equity cost of capital
of 16%, and a debt cost of capital of 7%. Restex's corporate tax
rate is 30%, and its market capitalization is $287 million.
a. If Restex's free cash flow is expected to be $8 million
one year from now and will grow at a constant rate, what expected
future growth rate is consistent with Restex's current market
value?
b. Estimate the value of Restex's interest tax shield.

A firm has an ROE of 6%, a debt/equity ratio of 0.7, a tax rate
of 35%, and pays an interest rate of 6% on its debt. What is its
operating ROA? (Do not round intermediate calculations. Round your
answer to 2 decimal places.)

Restex has a debt-equity ratio of 0.62, an equity cost
of capital of 14%, and a debt cost of capital of 11%. Restex's
corporate tax rate is 30%, and its market capitalization is $163
million.
a. If Restex's free cash flow is expected to be $3
million one year from now and will grow at a constant rate, what
expected future growth rate is consistent with Restex's current
market value?
b. Estimate the value of Restex's interest tax
shield.

Restex has a? debt-equity ratio of 0.69?, an equity cost of
capital of 13%?, and a debt cost of capital of 10%. Restex's
corporate tax rate is 38%?, and its market capitalization is $294
million.
a. If? Restex's free cash flow is expected to
be $11 million one year from now and will grow at a constant? rate,
what expected future growth rate is consistent with? Restex's
current market? value?
b. Estimate the value of? Restex's interest tax
shield.

A firm has an ROE of 2%, a debt/equity ratio of 0.6, a tax rate
of 30%, and pays an interest rate of 7% on its debt. What is its
operating ROA? (Do not round intermediate calculations. Round your
answer to 2 decimal places.)

Acme Storage has a market capitalization of $104
million, and debt outstanding of $136 million. Acme plans to
maintain this same debt-equity ratio in the future. The firm pays
an interest of
7.5% on its debt and has a corporate tax rate of
38%.
a. If Acme's free cash flow is expected to be $21.60
million next year and is expected to grow at a rate of 3% per
year, what is Acme's WACC?
b. What is the value of...

Restex has a debt-equity ratio of 0.56, an equity cost of
capital of 18%, and a debt cost of capital of 14%. Restex's
corporate tax rate is 21%, and its market capitalization is $272
million.
a. If Restex's free cash flow is expected to be $3 million one
year from now and will grow at a constant rate, what expected
future growth rate is consistent with Restex's current market
value?
If Restex's free cash flow is expected to be $3...

TVA currently has a debt-equity ratio of 0.2 and an average tax
rate of 34%. Using the CAPM, the firm estimates that its current
equity ß is 1 and its current debt ß is 0.2857. The risk-free rate
is 2% and the expected equity market risk premium (MRP) is 7%.
The firm is considering a new capital structure with a
debt-equity ratio of 0.9. Any proceeds from issuing new debt will
be used to repurchase shares. An investment bank has...

7. A company has a target debt-to-equity ratio of 1.36. Its WACC
is 11.46%, and the tax rate is 35%. If the company's cost of equity
is 17.66%, what is its pre-tax cost of debt?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 52 minutes ago

asked 56 minutes ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 2 hours ago

asked 3 hours ago

asked 3 hours ago