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Darina [25.2K]
4 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]4 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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Answer:

c. she is personally motivated to devote time and energy to the information.

Explanation:

central route is when you actively think about and weight information against what you already know; considering arguments carefully.

Nancy will be more likely to process this information through the central route if she is personally motivated to devote time and energy to the information.

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3 years ago
Suppose a basket of goods and services has been selected to calculate the CPI and 2014 has been selected as the base year. In 20
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Answer:Consumer Price Index (CPI) 2016 = 111.54

Explanation:

consumer price index is a measure of price change over a period of time in other words consumer price index is a measure of inflation. A number of good are selected and their prices are monitored each year in order to measured against the base year prices in order to determine  changes in the general price level.

The goods selected represent the spending patterns of the an average consumer in that economy or country. When the price of these goods rise over time when compared to the Basket Cost of the base year we can assume that there is a rise in the general price level

Base year = 2014

Basket's cost 2014= $52

Base cost 2016 = $58

Consumer Price index (CPI) 2016 = Basket costs 2016/base year Basket cost 2014.

Consumer Price index (CPI) 2016 = 58/52 = 1.115384615 x 100

Consumer Price Index (CPI) 2016 = 111.5384615

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5 0
3 years ago
A potential bondholder is considering four companies for investment. Which company has the lowest likelihood of defaulting on th
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Answer:

Company 4 has a times interest earned ratio of 14.3.

Explanation:

The times interest earned (TIE) ratio is a measure of a company's ability its ability to pay its debts based on its current income. Is an indication of a company's relative freedom from the constraints of debt

A higher TIE number shows that a company has enough cash after paying its obligations to continue to invest in the business.

In this particular case, it is company 4, because its TIE is the highest

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A wealth gap is an economic difference between
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You are offered a chance to buy an asset for $5,250 that is expected to produce cash flows of $750 at the end of Year 1, $1,000
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The rate of return I would earn if you bought the asset is 16.91.

<h3>What is the internal rate of return?</h3>

Internal rate of return is the discount rate that equates the after-tax cash flows from an investment to the amount invested. It is a capital budgeting method.

IRR can be calculated with a financial calculator

  • Cash flow in year 0 = $-5250
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IRR = 16.91%

To learn more about the internal rate of return, please check: brainly.com/question/24172627

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