fm3 6 - asking for the tax rate that would cause the...

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Answers and Solutions: 3 - 6 3-9 A-T yield on FLA bond = 5%. A-T yield on AT&T bond = 7.5% - Taxes = 7.5% - 7.5%(0.35) = 4.875%. Check: Invest $10,000 @ 7.5% = $750 interest. Pay 35% tax, so A-T income = $750(1 - T) = $750(0.65) = $487.50. A-T rate of return = $487.50/$10,000 = 4.875%. A-T yield on AT&T preferred stock: A-T yield = 6% - Taxes = 6% - 0.3(6%)(0.35) = 6% - 0.63% = 5.37%. Therefore, invest in AT&T preferred stock. We could make this a harder problem by
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Unformatted text preview: asking for the tax rate that would cause the company to prefer the Florida bond or the AT&T bond. 3-10 EBIT = $750,000; DEP = $200,000; 100% Equity; T = 40% NI = ?; NCF = ?; OCF = ? First, determine net income by setting up an income statement: EBIT $750,000 Interest EBT $750,000 Taxes (40%) 300,000 NI $450,000 NCF = NI + DEP = $450,000 + $200,000 = $650,000....
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This note was uploaded on 07/13/2011 for the course FIN 4414 taught by Professor Staff during the Spring '08 term at University of Florida.

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