What is the value of the firm tax shield

Assignment Help Financial Management

Reference no: EM131089387

Cesar Digital Systems has EBIT of $500,000, a growth rate of 5%, and faces a tax rate of 40%. In order to support growth, Cesar must reinvest 50 percent of its EBIT in net operating assets. Cesar has $400,000 in 10% debt outstanding. A similar company with no debt has a cost of equity of 12%. (Note that this problem assumes growth in earnings, otherwise referred to as MM extension with growth.

What is the value of the firm’s tax shield? a. $228,571.43 b. $714,285.71 c. $285,714.29 d. None of the above

According to the MM extension with growth, what is the firm’s unlevered value? a. $228,571.43 b. $714,285.71 c. $285,714.29 d. None of the above

Reference no: EM131089387

Questions Cloud

Revenues generated by new product are forecast : Revenues generated by a new product are forecast as follows: Year Revenue 1 $40,000 2 30,000 3 20,000 4 10,000 5 -0- no sales after year 4 Expenses are expected to be 40% of revenues, and working capital required in each year is expected to be 20% of..

Mortgage loans with monthly payment : A local bank offers 40 year mortgage loans with a monthly payment of $1,000 each month. The interest rate for these loans is 6% per year compounded monthly. What is the most expensive house you can buy with a down payment of $15,000?

What is the return on assets and return on equity : Keller Cosmetics maintains an operating profit margin of 8.45% and a sales-to-assets ratio of 3.80. It has assets of $590,000 and equity of $390,000. Interest payments are $39,000 and the tax rate is 40%. What is the return on assets? What is the ret..

What is the expected risk-free rate of return : If asset A has a beta of 1.3, has an expected return of 25 percent, and the expected market return is 20 percent, what is the expected risk-free rate of return?

What is the value of the firm tax shield : Cesar Digital Systems has EBIT of $500,000, a growth rate of 5%, and faces a tax rate of 40%. In order to support growth, Cesar must reinvest 50 percent of its EBIT in net operating assets. What is the value of the firm’s tax shield?

Evaluate relevant information from variety of sources : Communicate clearly, concisely and correctly in the written, spoken and visual form that fulfills the purpose and meets the needs of the audience; Apply a systematic approach to solve problems;

Description of data collection and analysis methods : HI6007 - Business Research Report Proposal A business research topic. Strengthen and improve initial proposal and a brief literature review of the research topic. Produce 2 to 3 pages on background information on your research topic.

Hedge short call option when the strike price : The current price of a non-dividend-paying stock is $30. Over the next six months it is expected to rise to $36 or fall to $26. Assume the risk-free rate is zero. What long position in the stock is necessary to hedge a short call option when the stri..

Quantitative techniques for business : The aim of this project is to evaluate di↵erent portfolio compositions of financial assets based on time series data. It requires both the statistics and mathematics components of the unit and you should be able to do parts of the project as the u..

User Account

All Pages