What is the amount of pelameds interest tax

Reference no: EM13499250

1.Pelamed Pharmaceuticals has EBIT of $325 million in 2006. In addition, Pelamed has interest expenses of $125 million and a corporate tax rate of 40%.

a. What is Pelamed’s 2006 net income?

b. What is the total of Pelamed’s 2006 net income and interest payments?

c. If Pelamed had no interest expenses, what would its 2006 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 2006?

2.Grommit Engineering expects to have net income next year of $20.75 million and free cash flow of $22.15 million. Grommit’s marginal corporate tax rate is 35%.

a. If Grommit increases leverage so that its interest expense rises by $1 million, how will its net income change?

b. For the same increase in interest expense, how will free cash flow change?

3.Suppose the corporate tax rate is 40%. Consider a firm that earns $1000 before interest and taxes each year with no risk. The firm’s capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 5%.

a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm’s equity?

b. Suppose instead the firm makes interest payments of $500 per year. What is the value of equity? What is the value of debt?

c. What is the difference between the total value of the firm with leverage and without leverage?

d. The difference in part (c) is equal to what percentage of the value of the debt?

4.Braxton Enterprises currently has debt outstanding of $35 million and an interest rate of 8%. Braxton plans to reduce its debt by repaying $7 million in principal at the end of each year for the next five years. If Braxton’s marginal corporate tax rate is 40%, what is the interest tax shield from Braxton’s debt in each of the next five years?

5.Your firm currently has $100 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $25 million of the balance each year. Suppose that the marginal corporate tax rate is 40%, and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt?

6.Arnell Industries has just issued $10 million in debt (at par). The firm will pay interest only on this debt. Arnell’s marginal tax rate is expected to be 35% for the foreseeable future.

a. Suppose Arnell pays interest of 6% per year on its debt. What is its annual interest tax shield?

b. What is the present value of the interest tax shield, assuming its risk is the same as the loan?

c. Suppose instead that the interest rate on the debt is 5%. What is the present value of the interest tax shield in this case?

7.Ten years have passed since Arnell issued $10 million in perpetual interest only debt with a 6% annual coupon, as in Problem 6. Tax rates have remained the same at 35% but interest rates have dropped so Arnell’s current cost of debt capital is 4%.

a. What is Arnell’s annual interest tax shield?

b. What is the present value of the interest tax shield today?

8. Bay Transport Systems (BTS) currently has $30 million in debt outstanding. In addition to 6.5% interest, it plans to repay 5% of the remaining balance each year. If BTS has a marginal corporate tax rate of 40%, and if the interest tax shields have the same risk as the loan, what is the present value of the interest tax shield from the debt?

9.Safeco Inc. has no debt, and maintains a policy of holding $10 million in excess cash reserves,invested in risk-free Treasury securities. If Safeco pays a corporate tax rate of 35%, what is the cost of permanently maintaining this $10 million reserve? (Hint: what is the present value of the additional taxes that Safeco will pay?)

10.Rogot Instruments makes fine Violins and Cellos. It has $1 million in debt outstanding, equity valued at $2 million, and pays corporate income tax at rate 35%. Its cost of equity is 12% and its cost of debt is 7%.

a. What is Rogot’s pretax WACC?

b. What is Rogot’s (effective after-tax) WACC?

Reference no: EM13499250

Questions Cloud

Explain main effects and interaction effects : What is a factor? How can the use of factors benefit a design and explain main effects and interaction effects.

Discuss moral responsibility and moral standards : Discuss moral responsibility and moral standards.

Explain what is the volume of a solution of 5 m naoh : What is the volume of a solution of 5 M NaOH that must be added to adjust the pH from 4 to 9 in 100 mL of a 100 mM solution of phosphate buffer (0.2 pt)

A large domestic manufacturing company : The total rewards director for a large domestic manufacturing company.

What is the amount of pelameds interest tax : Suppose the corporate tax rate is 40%. Consider a firm that earns $1000 before interest and taxes each year with no risk. The firm’s capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capita..

How long does it take the proton to reach this speed : A proton accelerates from rest in a uniform electric field of 680 N/C. At some later time, its speed is 1.42 106 m/s. How long does it take the proton to reach this speed

What are tax concepts involved in completing the form 1040 : What are the tax concepts involved in completing the Form 1040? Explain in detail and what are the tax planning considerations you took into account while completing the Form 1040?

Discount travel that inspires memorable vacations : Discount travel that inspires memorable vacations

Compute the magnitude of acceleration of the proton : A proton accelerates from rest in a uniform electric field of 620 N/C. At some later time, its speed is 1.16 106 m/s. what is the magnitude of acceleration of the proton

User Account

All Pages