BD_SM_c15 - Chapter 15 Debt and Taxes 15-1. a. Net Income =...

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Chapter 15 Debt and Taxes 15-1. a. Net Income () ( ) EBIT Interest Taxes 325 125 1 0.40 $120 =− = × −= million. b. Net income + Interest = 120 + 125 = $245 million c. Net income EBIT Taxes 325 1 0.40 $195 = × million. This is 245 195 $50 million lower than part (b). d. Interest tax shield 125 40% $50 = million 15-2. a. Net income will fall by the after-tax interest expense to $20.750 1 1 0.35 $20.10 −× − = million. b. Free cash flow is not affected by interest expenses. 15-3. a. Net income 1000 1 40% $600 = . Thus, equity holders receive dividends of $600 per year with no risk. 600 E $12,000 5% == b. Net income ( ) 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 leverag = $12,000 Difference = 16,000 – 12,000 = $4000 d. 4,000 40% 10, 000 corporate tax rate 15-4. Y e a r 0 12345 Debt 35 28 21 14 7 0 I n t e r e s t 2 . 82 . 2 41 . 6 81 . 1 20 . 5 6 Tax Shield 1.12 0.896 0.672 0.448 0.224
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118 Berk/DeMarzo Corporate Finance 15-5. Y e a r ± ± 0 ±1 ±2345 Debt 100 75 50 25 0 0 Interest 10 7.5 5 2.5 0 T a x S h i e l d 4 3210 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. 15-7. Interest tax shield in year 1 = $30 × 6.5% × 40% = $0.78 million. As the outstanding balance declines, so will the interest tax shield. Therefore, we can value the interest tax shield as a growing perpetuity with a growth rate of g = -5% and r = 6.5%: $0.78 PV $6.78 6.5% 5% + million 15-8.
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This note was uploaded on 10/08/2010 for the course ENGIN 120 taught by Professor Ilan during the Spring '08 term at University of California, Berkeley.

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BD_SM_c15 - Chapter 15 Debt and Taxes 15-1. a. Net Income =...

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