1answer.
Ask question
Login Signup
Ask question
All categories
  • English
  • Mathematics
  • Social Studies
  • Business
  • History
  • Health
  • Geography
  • Biology
  • Physics
  • Chemistry
  • Computers and Technology
  • Arts
  • World Languages
  • Spanish
  • French
  • German
  • Advanced Placement (AP)
  • SAT
  • Medicine
  • Law
  • Engineering
Komok [63]
3 years ago
15

Suppose the corporate tax rate is 35%. Consider a firm that earns $10,000 before interest and taxes each year with no risk. The

firm’s capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 5.0%.
a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm’s equity?
b. Suppose instead the firm makes interest payments of $1,500 per year. What is the value of the equity? What is the value of the debt?
c. What is the difference between the total value of the firm with leverage and without leverage?
d. To what percentage of the value of the debt is the difference in part c) equal?
Business
1 answer:
Lunna [17]3 years ago
4 0

Answer:

a) $130,000

b)Equity = $110,500

Value of debt = $30,000

c) $10,500

d) 35%

Explanation:

Given:

Tax rate = 35%

Earnings before tax & interests = $10,000

Risk free interest rate = 5.0%

a) Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm’s equity?

First find net income.

Net income = $10,000(1 - 0.35)

= $(10,000 - 0.65)

= $6,500

Since net income is $6,500 it means equity shareholders receive dividends of $6,500 annually without risk.

Therefore,

equity = Net income / risk free rate

= 6500/0.05

= $130,000

Equity = $130,000

b) First find net income:

($10,000 - $1,500)(1 - 0.35)

($8,500)(0.65) = $5,525

Net income = $5,525

Find equity:

Equity = Net income / risk free rate

= $5,525 / 0.05

= $110,500

Equity = $110,500

Value of debt:

Use the formula below to find value of debt:

Debt = Interest / risk free rate

= $1,500 / 0.05

= $30,000

Value of debt = $30,000

c) Find the total value of the firm with leverage:

$110,500 + $30,000

= $140,500

The total value of the firm without leverage: $130,000

Now, the difference between the total value of the firm with leverage and without leverage:

$140,500 - $130,000

= $10,500

Difference = $10,500

d) Find the percentage difference:

% difference = difference/debt * 100

= \frac{10500}{30000} * 100

0.35 * 100 = 35 percent

You might be interested in
Gloria just started working for GlenMack. As part of her signing bonus, she received 20 shares of GlenMack stock. Gloria is exci
EastWind [94]

Answer:

Public Company

Explanation:

In the given case, since it is mentioned that Gloria working for GlenMack now as a part of the signing bonus she received twenty shares from the stock of GlenMack now she is excited to contribute to the company and also wants to track the shares value on the new york stock exchange so here the Glenmust must be public company as the stock are listed on the stock exchange

So the same is to be relevant

3 0
2 years ago
Contracts Capstone 18 of 25Items 36:16 Assignment completion: 72.00% Item 18After selecting an answer, more information on the t
Debora [2.8K]

Answer: The creditor will be able to recover $1,350

Explanation:

The amount that the creditor will be able to recover will be the contract price less the damages for the minor breach by the company.

In this case, the company finished all of the tasks except for the cleaning of the oven. Since this is minor with regards to the contract, the company will be seen to have performed its contract.

Since we are told the cost of finishing the job was 10% of the contract cost, this will be regarded as a minor breach, therefore, the owner of the condominium cannot avoid the payment of the price of the contract price. In this case, the creditor will be able to recover ($1500 - $150) = $1,350.

4 0
2 years ago
a mortgagge loan in which the interest rate charged fluctuates with the level of current interest rates is called
solmaris [256]

Variable interest rate mortgage loans have an interest rate that varies depending on the level of current interest rates.

An interest rate on a loan or security that fluctuates over time because it is based on an underlying benchmark interest rate or index that is interest rates subject to Variable interest rate regular changes is known as a variable interest rate (also known as an "adjustable" or "floating" rate).

A variable interest rate has the obvious advantage that if the underlying rate or index decreases, so do the borrower's interest payments. On the interest rates other hand, if the underlying index increases, interest payments rise. Fixed interest rates are stable, as opposed to variable interest rates.

Variable interest rate mortgage loans have an interest rate that varies depending on the level of current interest rates.

Learn more about Variable interest rate here

brainly.com/question/2496648

#SPJ4

8 0
1 year ago
The Environmental Protection Agency is considering an order that a 500-acre area on the outskirts of a large city be preserved i
Usimov [2.4K]

Answer:

The 500-acre area is scarce because it has alternative uses: preservation in its natural state or a site for homes. A choice must be made between these uses. The opportunity cost of preserving the land in its natural state is the forgone value of the land as a housing development. The opportunity cost of using the land as a housing development is the forgone value of preserving the land.

Explanation:

5 0
3 years ago
What is the primary source of fuel in south america
Sati [7]
The primary source of fuel in South America is petroleum.
6 0
2 years ago
Other questions:
  • Our web development team is creating an e-commerce site for a new product. the marketing team's goal is to develop markets world
    15·1 answer
  • Boyd Docker recorded the following transactions during the month of April. Apr. 3 Cash 3,400 Service Revenue 3,400 16 Rent Expen
    15·1 answer
  • Match the different types of incomes to their sources.
    5·2 answers
  • Leona bought two different brands of wine from vineyards in Australia. When asked for her opinion about the wines, she said that
    8·1 answer
  • A(n) _____ describes your core values and highest career goals.
    6·2 answers
  • How are you avalon23413?
    8·2 answers
  • A brewery produced regular beer and a low carb "light beer". Steady Customers of the brewery buy 10 units of regular beer and 15
    8·1 answer
  • Sound Audio manufactures and sells audio equipment for automobiles. Engineers notified management in December 2021 of a circuit
    9·1 answer
  • A big-picture view refers to the blueprint of a corporate facility. <br> True or False
    7·1 answer
  • The income elasticity of demand for peanut butter is 0.1. From this, we know that peanut butter is a(n) __________ because _____
    11·1 answer
Add answer
Login
Not registered? Fast signup
Signup
Login Signup
Ask question!