# Project #31040 - Week 6

Hi, I will include the Excel worksheet and the link to the text I'm using (Ch 14, 15). Thank you

Brealey, R. A., Myers, S. C. & Allen, F. (2011). Principles of Corporate Finance, Concise Edition, (2nd ed.). New York, NY: McGraw-Hill Irwin.

 Problem 14-2 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? Answer: Step 1: Tax rate - Tc F a. Permanent Debt - D F b. Additional Debt - D F Step 2: Formula (in words) Calculation a. Tax shield T C b. Tax shield T C Benefit to Shareholders C TIP: difference between a and b

 Problem 14-24 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? Answer: Pros T Cons T

 Problem 15-6 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. Answers: Formula (in words) Calculation a. APV stock issue T C TIP: p.394 b. APV debt increases T C TIP: p.393

 Problem 15-9 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. Answer: T

 Subject Business Due By (Pacific Time) 05/17/2014 01:00 pm
TutorRating
pallavi

Chat Now!

out of 1971 reviews
amosmm

Chat Now!

out of 766 reviews
PhyzKyd

Chat Now!

out of 1164 reviews
rajdeep77

Chat Now!

out of 721 reviews
sctys

Chat Now!

out of 1600 reviews

Chat Now!

out of 770 reviews
topnotcher

Chat Now!

out of 766 reviews
XXXIAO

Chat Now!

out of 680 reviews