BD_SM15 - C hapter 15 Debt and Taxes 15-1. a. b. c. d. e....

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Chapter 15 Debt and Taxes 15-1. a. a. Net Income ( 29 ( 29 EBIT Interest Taxes 325 125 1 0.40 $120 = - - = - × - = million. b. b. Net income + Interest = 120 + 125 = $245 million c. c. Net income ( 29 EBIT Taxes 325 1 0.40 $195 = - = × - = million. This is 245 195 $50 - = million lower than part (b). d. d. Interest tax shield 125 40% $50 = × = million e. 15-2. f. a. Net income will fall by the after-tax interest expense to ( 29 $20.750 1 1 0.35 $20.10 - × - = million. g. b. Free cash flow is not affected by interest expenses. h. 15-3. a. Net income ( 29 1000 1 40% $600 = × - = . Thus, equity holders receive dividends of $600 per year with no risk. 600 E $12,000 5% = = b. Net income ( 29 ( 29 300 1000 500 1 0.40 $300 E $6000 5% = - × - = = = . Debt holders receive interest of $500 per year D = $10,000 c. With leverage = 6,000 + 10,000 = $16,000 Without leverage = $12,000 Difference = 16,000 – 12,000 = $4000 d. 4,000 40% 10,000 = = corporate tax rate i. 15-4. Year 0 1 2 3 4 5 Debt 35 28 21 14 7 0 Interest 2.8 2.24 1.68 1.12 0.56 Tax Shield 1.12 0.896 0.672 0.448 0.224
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118 Berk/DeMarzo • Corporate Finance 15-5. Year 0 1 2 3 4 5 Debt 100 75 50 25 0 0 Interest 10 7.5 5 2.5 0 Tax Shield 4 3 2 1 0 PV $8.30 15-6. a. Interest tax shield $10 6% 35% $0.21 = × × = million b. PV(Interest tax shield) $0.21 $3.5 0.06 = = million c. Interest tax shield = $10 × 5% × 35% = $0.175 million. $0.175 PV $3.5 0.05 = = million. j.
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This note was uploaded on 12/28/2009 for the course FEWEB CORPFIN taught by Professor Dorsman during the Spring '09 term at Vrije Universiteit Amsterdam.

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BD_SM15 - C hapter 15 Debt and Taxes 15-1. a. b. c. d. e....

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