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Question - AMC IRON Corporation has 12 million shares outstanding, now trading at 65f per share. The firm has estimated the expected rate of return to shareholders at about 15%. It has also issued 5-year bonds of 400 million at an interest rate of 8%. It pays tax at a marginal rate of 35%.
Required -
a) What is AMC's after-tax WACC?
b) Compute the present value of interest tax shields generated by the 5-year bonds.
c) A customer has ordered goods from AMC generating a present value of £4,500. The present value of production costs is £3,000. Assuming there is no possibility of repeat orders, what is the minimum level of P (probability that the customer will pay up) at which AMC is justified in extending credit?
d) How is Modigliani-Miller's Proposition I modified when taxes and financial distress costs are considered?
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