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Financial Statements, Cash Flow, and Taxes8

# Financial Statements, Cash Flow, and Taxes8 - 59 Assume...

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Old Exam Questions - Financial Statements, Cash Flow, and Taxes Page 38 of 44 Pages 59. Assume that an all equity firm has assets of \$20,000 and a return on assets (ROA) of 13.00 percent. And that the firm makes the decision to replace 1/2 of its equity with debt that has a before-tax cost of 8 percent Assuming that the firm’s tax rate is 40 percent, calculate the firm’s ROE after the debt has been issued and equity has been repurchased. (HINT: Think about leverage and tax shelter effects of using debt that we demonstrated in class.) A. 20.20% B. 21.70% C. 20.70% D. 22.20% E. 21.20% 60. Assume that in 2006 (today) a firm had EBIT of \$9,000,000, a tax rate of 40 percent, and that the firm’s total invested capital could be defined as \$20,450,000 (consisting of \$8,000,000 of debt and \$12,450,000 of equity), and that its weighted average cost of capital is 12 percent. (Hint: you should now be able to calculate economic value added (EVA) for 2006.) Now assume that EVA is expected to grow at a long-run sustainable growth rate of 4 percent each year. Given this information, determine the present value today (2006) of all future EVAs to be earned by the firm.

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