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a. 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. Debt is always cheaper than equity. How would you respond to this comment?
Problems for Benchmark HW: There are issues here that were not covered in live lecture, but here are some issues that you need to be conscious of when attempting the problems. t
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Your firm purchased a line of computer equipment for $1.5M four years ago. It is assigned a CCA rate of 20% and the firm has a tax rate of 35%. At the end of this year (year 4
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