PS5 - Problem Set #5 Business Finance (03075 & 03085)...

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Problem Set #5 Business Finance (03075 & 03085) Please note that you do not have to submit your answers. They will not be graded. But, similar questions will appear in the quiz. Answer keys will be uploaded at Blackboard soon. 1. ( MM with Tax ) The market value of a firm with $500,000 of debt is $1.7 million. The pretax interest rate on debt is 10 percent per annum, and the company is in the 34 percent tax bracket. The company expects $306,000 of earnings before interest and taxes every year in perpetuity. a. (2 points) What would the value of the firm be if it were financed entirely with equity? [ Hint : use Proposition I of the MM Model with Tax] b. (2 point) What amount of the firm’s annual earnings is available to stockholders? 2. ( MM with Tax ) The Holland Company expects perpetual earnings before interest and taxes (EBIT) of $4 million per year. The firm’s after-tax, all-equity discount rate (r 0 ) is 15 percent. Holland is subject to a corporate tax rate of 35 percent. The pretax cost of the firm’s debt capital is 10 percent per annum, and the firm has $10 million of
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PS5 - Problem Set #5 Business Finance (03075 & 03085)...

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