c09final-winter2008-solution

c09final-winter2008-solution - ANSWER 1 a EBIT Interest EBT...

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ANSWER 1: All Equity Equity + Debt a. EBIT $25,000,000 $25,000,000 Interest 0 9,000,000 EBT $25,000,000 $16,000,000 Taxes @ 40% 10,000,000 6,400,000 Net Income $15,000,000 $9,600,000 All Equity Equity + Debt 3 Stockholders Dividends $15,000,000 $9,600,000 Taxes @ 30% 4,500,000 2,880,000 $10,500,000 $6,720,000 3 Bondholders Interest 0 $9,000,000 Taxes @ 30% 2,700,000 0 $6,300,000 Total to all investors $10,500,000 $13,020,000 2 Under MM without personal taxes we know that debt increased the cash flows to all investors. Since interest and dividends are taxed at the same personal rate, personal taxes only reduce the final cash flows to the investors. Personal taxes do not alter the conclusion that debt increases the value of the firm. b. All Equity Plan: Shareholders required rate of return after personal taxes 12%(1-0.3) = 8.4% 3 0 ) 1 )( 1 ( r T T EBIT V s c u - - = = 084 . 0 ) 3 . 0 1 )( 4 . 0 1 ( 000 , 000 , 25 - - = $125,000,000 Equity + Debt Plan: - - - - + = ) 1 ( ) 1 )( 1 ( 1 B s c u L T T T V V 2 000 , 000 , 100 ) 3 . 0 1 ( ) 30 . 0 1 )( 4 . 0 1 ( 1 000 , 000 , 125 $ - - - - + = = $125,000,000 + 40,000,000 = $165,000,000
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c. All Equity Equity + Debt Stockholders Dividends $15,000,000 $9,600,000 2 Taxes @ 25% 3,750,000 2,400,000 $11,250,000 $7,200,000 Bondholders Interest 0 $9,000,000 2 Taxes @ 35%
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This note was uploaded on 04/19/2010 for the course MGT MGTC09 taught by Professor Syedahmed during the Spring '10 term at University of Toronto.

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c09final-winter2008-solution - ANSWER 1 a EBIT Interest EBT...

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