Chapter 15 Problems & Solutions

# Chapter 15 Problems & Solutions - Math 3650 Chapter 15...

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Math 3650 Chapter 15 1. What is a firm’s marginal tax rate? 2. What is the interest tax shield? What is the general formula for calculating the value that the interest tax shield adds to a corporation? Why, in practice, is this value difficult to calculate? 3. Taking into account the interest tax shield, what is a firm’s weighted average cost of capital? 4. Which firms in theory would have higher leverage if they took advantage of the interest tax shield in their corporate structure- high or low growth firms? Why? 5. Following are U.S. Corporate tax rates Calculate, in dollars, the interest tax shield for the current year for a firm that has earnings before interest and taxes (EBIT) of \$5,000,000 and has interest costs of \$2,000,000. 6. A firm has an equity cost of capital of 15%, a debt cost of capital (before taxes) of 6%, and a marginal tax rate of 35%. It’s ratio of its market value debt to equity is 25%. Calculate the firms weighted average cost of capital, after taking into account taxes.

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