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Darina [25.2K]
3 years ago
15

Trade-off Theory. Smoke and Mirrors currently has EBIT of $25,000 and is all-equity financed. EBIT is expected to stay at this l

evel indefinitely. The firm pays corporate taxes equal to 35 percent of taxable income. The discount rate for the firm"s projects is 10 percent.
a. What is the market value of the firm?
b. Now assume the firm issues $50,000 of debt paying interest of 6 percent per year and uses the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm (debt plus equity)?
Business
1 answer:
Paul [167]3 years ago
6 0

Answer:

A. $162,500

B. $17,500

Explanation:

Data

EBIT = $25,000

Tax rate = T = 35%

Discount Rate = r = 10%

Requirement A:  Market Value

The Market value of the firm can be calculated by using the following formula

Market Value =  \frac{EBIT(1-T)}{r}

Market Value = \frac{25000(1-0.35)}{0.1}

Market Value = $162,500

Requirement B: Total value of firm If issues $50,000 of debt paying 6% interest

The market value of the firm increases by the present value of the Interest tax shield

The present value of tax shield = Amount of debt x Tax Rate

The present value of tax shield = $50,000 x 35%

The present value of tax shield = $17,500

The market value of the firm will be increased by $17,500

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Stand alone principle

Explanation:

The principle that an organization must determine whether to undertake a project on the basis of the results of similar projects with the same risk.

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3 years ago
The following transactions occurred for Lantana Company during its first month of operations and have been recorded in the T-acc
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Answer:

1. T-account balances.

<em>Common stock</em>

$50,000

<em>Land </em>

$20,000

<em>Cash </em>

$34,500

<em>Note Payable</em>

$15,000

<em>Supplies </em>

$900

<em>Trade Payable</em>

$400

<em>Equipment </em>

$10,000

2. A classified balance sheet for Lantana Company

Non - Current Assets

Land                                     $20,000

Equipment                            $10,000

Total Non - Current Assets $30,000

Current Assets

Supplies                                    $900

Cash                                     $34,500

Total Current Assets           $35,400

Total Assets                         $65,400

Equity and Liabilities

Equity

Common stock                   $50,000

Total Equity                         $50,000

Current Liabilities

Trade Payable                         $400

Total Current Liabilities           $400

Non - Current Liabilities

Note Payable                     $15,000

Total Non - Current Liabilities  $15,000

Total Equity and Liabilities $65,400

Explanation:

T-account balances.

Common stock

$50,000

Land

$20,000

Cash

$50,000 - $5,000 - $10,000 - $500 = $34,500

Note Payable

$15,000

Supplies

$900

Trade Payable

$900 - $500 = $400

Equipment

$10,000

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Which of the following statements is true of training?
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Answer:

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The cartel of oil-producing nations (OPEC) once controlled about 80% of the world petroleum market, but OPEC's market share has
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Answer:

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After you send in your FAFSA form what will you receive back
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