User Account

All Pages

What is the value v of the unlevered firm note that vu is

Assignment Help Finance Basics
Reference no: EM13566327

Companies U and L are identical in every respect except that U is unlevered while L has $10 million of 5% bonds outstanding. Assume that (1) all of the MM assumptions are met, (2) both firms are subject to a 40% federal-plus-state corporate tax rate, (3) EBIT is $2 million, (4) Investors in both firms face a tax rate of Td = 28% on debt income and Ts = 20% (on average) on stock income, and (5) the appropriate required pre-personal-tax rate rsU is 10%.

a. What is the value V, of the unlevered firm? (Note that Vu is now reduced by the personal tax on stock income, so VU = $12 million as in Problem 26-6.)

b. That is the value of VL?

c. What is the gain from leverage in this situation? Compare this with the gain from leverage in Problem 26-6.

d. Set Tc = Ts = Td = 0. What is the value of the levered firm? The gain from leverage?

e. Now suppose Ts = Td = 0 and Tc = 40%. What are the value of the levered firm and the gain from leverage?

f. Assume that Td = 28%, Ts = 28%, and Tc = 40%. Now what arc the value of the levered firm and the gain from leverage?

Reference no: EM13566327

Questions Cloud

A company issues bonds dated january 1 with a par value of : a company issues bonds dated january 1 with a par value of 300000. the bonds mature in 5 years. the contract rate is 9
What types of non-current assets are carried on the balance : 1. what types of non-current assets are carried on the balance sheet?2. what is the companys percentage of non-current
A stock has annual returns of 6 percent 14 percent -3 : a stock has annual returns of 6 percent 14 percent -3 percent and 2 percent for the past four years. the arithmetic
A company purchased equipment and signed a 7-year : a company purchased equipment and signed a 7-year installment loan at 9 annual interest. the annual payments equal
What is the value v of the unlevered firm note that vu is : companies u and l are identical in every respect except that u is unlevered while l has 10 million of 5 bonds
Assume that all sales are made on a credit basis that the : search for avon products inc. access the 10-k filing for the most recent fiscal year. search or scroll to find the
What is the value v of the unlevered firm note that vu is : companies u and l are identical in every respect except that u is unlevered while l has 10 million of 5 bonds
I turns over its fixed assets 4 times a year it has : network communications has total assets of 1400000 and current assets of 600000. it turns over its fixed assets 4
What amount will be reported on nanas income statement for : nanas pie company prepared an amortization schedule to reflect a recent issue of bonds it sold. the schedule is

Reviews

Write a Review

Finance Basics Questions & Answers

  A financial manager is trying to decide whether to use edt

a financial manager is attempting to decide whether to use edt or wire transfer but must first calculate the minimum

  Calculation of cost of common equity for wacc decisions

Calculation of Cost of common Equity for WACC decisions and what is the estimated cost of common equity using the DCF approach

  Assume that you recently graduated with a degree in finance

1. discuss why financial markets are important to a healthy economy and how they contribute to economic growth.2.

  What does the upper control limit

What does the upper control limit of either a p, np, c, or u chart tell us about the process? What does the lower control limit tell us?

  Time value of money-questions

Find out the amount that should be deposited now at compound interest to provide the desired sum for each of the following:

  What is the arithmetic average return

The return on your portfolio over the last 5 years were -5%, 20%,0%,10%, and 5%. What is the arithmetic average return?

  What is the firms current roe

Consider a retailing firm with a net profit margin of 3.5%, a total asset turnover of 1.8, total assets of $44 million, and a book value of equity of $18 million.

  What is the firms cash conversion cycle

Whittington Inc. has the following data. What is the firm's cash conversion cycle?

  Explain the concept of duration and then comment on the

explain the concept of duration and then comment on the statement ldquoit is possible that a bond with a shorter

  Explain the risk involved in this strategy

Explain the risk involved in this strategy. Do you think the risk here is greater or less than it would be if the bond proceeds were used to finance U.S. operations? Why?

  what is the value of this endowment in today dollars

Assuming the cost of money is 3%, what is the value of this endowment in today's dollars? Show your work.

  Gold fields reports all amounts in millions of south

retained earnings relations. the balance sheet of gold fields limited see problem 1.22 for the year ended june 30 2007

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