Reference no: EM131027989
To complete the homework assignments in the templates provided:
1. The question is provided for each problem. You may need to refer to your textbook for additional information in a few cases.
2. You will enter the required information into the shaded cells.
3. The cells are coded:
a) T requires a text answer. Essay questions require references; use the textbook.
b) C requires a calculation, using Excel formulas or functions. You cannot perform the operation on a calculator and then type the answer in the cell. You will enter the calculation in the cell, and only the final answer will show in the cell. I will be able to review your calculation and correct, if necessary.
c) F requires a number only. In some problems, a "Step 1" is added to help you solve the problem.
d) Formula requires a written formula, not the numbers. For example, the rate of return = [(1 + nominal)/ (1+inflation)]-1, or D (debt) + E (equity) = V (value).
4. Name your assignment file as "lastnamefirstinitial-FINC600-Week#", and submit by midnight ET, Day 7.
Problem 1
Assume that MM's theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 40% corporate tax rate.
a. How much of the firm's value is accounted for by the debt-generated tax shield?
b. How much better off will UF's a shareholder be if the firm borrows $20 more and uses it to repurchase stock?
Problem 2
Some companies' debt-equity targets are expressed not as a debt ratio, but as a target debt rating on a firm's outstanding bonds. What are the pros and cons of setting a target rating, rather than a target ratio?
Problem 3
A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0). What is the project's APV in the following cases?
a. If the firm invests, it has to raise $500,000 by a stock issue. Issue costs are 15% of net proceeds.
b. If the firm invests, its debt capacity increases by $500,000. The present value of interest tax shields on this debt is $76,000.
Problem 4
The WACC formula seems to imply that debt is "cheaper" than equity--that is, that a firm with more debt could use a lower discount rate. Does this make sense? Explain briefly.
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