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Problem: Rosewood Industries has EBIT of $450 million and permanent debt of $2 billion. At that level of debt, the interest rate on the loan is 8.75%. The company is subject to a corporate tax rate of 35%.
Required:
Question 1: Calculate Rosewood's net income.
Question 2: Calculate the total of Rosewood's net income and interest payments.
Question 3: Calculate Rosewood's net income in case it had no interest expenses (unlevered net income). How much larger/smaller is the total calculated in (b) compared to Rosewood's unlevered net income? What does this difference represent?
Question 4: Calculate the total value of Rosewood's interest tax shield.
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