User Account

All Pages

What is the present value of the tax shield

Assignment Help Finance Basics
Reference no: EM132415639

Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table.

Table1: Information of the firms

Unlevered firm Levered firm

EBIT 10000 10000

Interest 0 3200

Taxable income 10000 6800

Tax (tax rate: 34%) 3400 2312

Net income 6600 4488

CFFA 6600 7688

Assuming that cost of debt =8%; unlevered cost of capital =10%; systematic risk of the asset is 1.5

1) Fill in the blanks

2) What is the present value of the tax shield? $13,600

3) What is the size of debt? $40,000

4) Calculate the following values:

a) value of unlevered firm; $66,000 b) value of the levered firm;$79,600 c) equity value; $39,600 d) Cost of equity; 12.02% e) cost of capital 8.63%; f) systematic risk of the equity 2.5

5) Suppose that the firm changes its capital structure so that the debt-to-equity ratio is 1.0, then recalculate the systematic risk of the equity 2.49

6) Based on the results of question (4), if there are the following two mutually exclusive projects. What is the crossover required rate of return for the two projects?

7) Based on the previous discussions, are you going to accept project A or B? Why?

Reference no: EM132415639

Questions Cloud

What is the maximum amount of the loan : Harry has a vested account balance of $60,000 and is looking to purchase a principal residence for his family instead of renting.
Calculate estimated cost of ending inventory : Calculate estimated cost of ending inventory using the gross profit method.
Explore the short-term and long-term impact of student loans : you will explore the short-term and long-term impact of student loans/other loans on your earnings, both positive and negative.
Determine the appropriate time to harvest the entire crop : Describe how you would determine the appropriate time to harvest the entire crop of shrimp.
What is the present value of the tax shield : Assuming that there is an unlevered firm and a levered firm. The basic information is given by the following table.
Discuss skills that will serve you greatest in your field : Discuss two concepts - skills that will serve you greatest in your chosen field - Provide examples of how this will prove beneficial going forward
What is the dollar value of equity : Sales for Company Y are $100,000 in 201X and the net profit margin is 9.0%. The Return on Equity is 20%. What is the dollar value of Equity?
Analyze the visual elements of cultural familiarity : Find two different images to be used on the organization's website page. One will be for the U.S. website, and one for the website in the country of your choice
Create global campaign that visually conveys social message : You are newly appointed to the communication team for a reputable philanthropic organization. The current task is for your team to create a global campaign.

Reviews

Write a Review

Finance Basics Questions & Answers

  Inherited an ordinary annuity

Today you inherited an ordinary annuity of $25000 paid at the end of the year for 15 years. You estimated a yield of 10% for this annuity.

  Kline construction is an all-equity firm that has projected

kline construction is an all-equity firm that has projected perpetual earnings before interest and taxes of 879000. the

  Which system would most likely yield lower debt and higher

An analyst who compares the debt ratios of firms under U.S. GAAP and IFRS must consider key differences in the two sets of standards related to convertible debt and troubled debt restructurings. In general, which system would most likely yield lower ..

  Expected return and standard deviation

Stock A has an expected return of 12% and a standard deviation of 40%. Stock B has an expected return of 18% and a standard deviation of 60%. The correlation coefficient between Stock A and B is 0.2. What are the expected return and standard devia..

  What was the semiannual interest rate when bonds were sold

Because the market interest rate increased immediately before the bonds were sold, the city received only $23.5 million from the bond sale. What was the semiannual interest rate when the bonds were sold?

  Using all this information what is the expected return for

for walt disney company find an estimate of beta for your company. you might consider examiningusing an industry

  Compute the mean, median and mode

A manager has selected a random sample of his league consumers. he asked them to record the number of games they bowl during the month December, including both league and open bowling.

  Suppose you receive 3000 a year in years a year in years 1

suppose you receive 3000 a year in years a year in years 1 through 4nbsp 4000 a year in years 5 through 9 and 2000

  Find the effective rent for option

Find the effective rent for each option given the following lease conditions over the next 5 years using a 12% discount rate:

  Explaining and analysing the project in detail

Explaining and Analysing the project in detail and finding NPV

  Depreciated straight-line to zero over the project

Dog Up! Franks is looking at a new sausage system with an installed cost of $450,000. This cost will be depreciated straight-line to zero over the project's five-year life, at the end of which the sausage system can be scrapped for $64,000.

  Calculate the bank risk weighted assets before and after

Calculate the bank's risk-weighted assets before and after the agreement. Problems 4 through 11 relate to a sequence of transactions at OldhatFinancial.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd