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jeyben [28]
3 years ago
11

Firm A and B have identical business except that their financing is different: Firm A: EBIT = X = $10, D = $20 Firm B: EBIT = X

= $10, D = $80 Suppose that corporate tax rate TC is 40%, cost of debt is RD is 10% for both. Please answer the following questions: Note: If your choice is A, then type in A. Do not type (A) or anything else. 1. Which firm has a greater FCF (free cash flow)? Your answer: (A) Firm A (B) Firm B (C) Both have the same FCF (D) Hard to say 2. What is firm A’s (annual) tax shield? Your answer: (A) $0 (B) $0.8 (C) $8 (D) $4 (E) Hard to say 3. What is firm B’s (annual) tax shield? Your answer: (A) $0 (B) $0.32 (C) $3.2 (D) $8 (E) Hard to say
Business
1 answer:
STALIN [3.7K]3 years ago
4 0

Answer:

1. Which firm has a greater FCF (free cash flow)?

  • (A) Firm A

2. What is firm A’s (annual) tax shield?

  • (B) $0.8

3. What is firm B’s (annual) tax shield?

  • (C) $3.2

Explanation:

since firm A's debt is $20, its value is $100, then its equity = $80

since firm B's debt is $80, its value is $100, then its equity = $20

Firm A's cash flow = (EBIT - interest expense) x (1 - tax rate) = [$10 - ($20 x 10%)] x 0.6 = $4.80

Firm B's cash flow = (EBIT - interest expense) x (1 - tax rate) = [$10 - ($80 x 10%)] x 0.6 = $1.20

Firm A's annual tax shield = taxable interest x tax rate = ($20 x 10%) x 40% = $0.80

Firm B's annual tax shield = taxable interest x tax rate = ($80 x 10%) x 40% = $3.20

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Answer:

The correct answer is E

Explanation:

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The formula to represent ROE is value of Net Income attributable to the equity shareholders.

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6 0
3 years ago
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Systematic acquisition and recording information concerning members of a given population is called census. This involves collecting and gathering data about the size and the composition of a population in a given country or nation. In the U.S for example census is undertaken after every ten years which involves tallying the population in the country and recording basic information such as age, sex and race. The census is used by the federal government among other reasons to establish the allocation of funding for education programs in the communities and states
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5 0
3 years ago
) when originally issued, an investment in bonds of Flushing Dough, Inc., promised to provide an annual coupon of 7.50%. The bon
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Answer:

The likely yield to maturity on the bonds is 10.23%.

Explanation:

The likely yield to maturity on the bonds can be calculated using the following RATE function in Excel:

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Substituting the values into equation (1), we have:

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Inputting =RATE(40,75,-735,1000) into a cell in an excel (Note: as done in the attached excel file), the YTM is obtained as 10.23%.

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Download xlsx
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2 years ago
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Answer:

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