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Explain the motivations behind debt covenants:
You are engineering a Leveraged-Buy-Out (LBO) of ACME Industries, an industrial bottle maker. After the LBO, the firm will be financed with 90% debt and 10% equity. Fred Farber, the CEO, will own 30% of the shares. Fred thinks that the proposed capital structure is too highly levered and points out that, in the first few years, the firm will not be able to use all its debt tax shields. Initially, the interest payments are $400m per year and EBIT is only $300m per year. However, EBIT is projected to increase 20% per year for the next five years. Provide Fred a true tax argument that supports the high level of debt. Take into account his personal taxes as well as corporate taxes. Does your tax argument depend on whether Fred wants to dilute his ownership of the company in the future? b. Explain the motivations behind debt covenants? Mention at least three typical provisions in the debt covenants and how it achieves its objective?
c. Debt is always cheaper than equity. How would you respond to this comment?
Ace Company has a 25 percent marginal tax rate and uses a 10% discount rate to compute NPV. The firm started a venture that will yield the following before-tax cash flows: year 0,
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Prepare answers to each of the following questions. Assume a tax rate of 30%. (i) Harry Ltd has a balance of prepaid rent in the balance sheet amounting to $100 000 as at 30 Ju
28) Explain how Treasury Department Circular 230 differs from the AICPA’s Statements on Standards for Tax Services.
there is customer invoice booked with cst 2% (tru AFP) and now the customer says he wont provide c from.. so now we hv to charge extra 3% cst.. how to book this
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