Fm17 7 - 17-7 a VU = b EBIT(1 − TC(1 − Ts EBIT(1 − TC $2(0.6 = = = $12 million rsU(1 − Ts rsU 0.10 (1 − TC(1 − Ts ⎤ VL = VU ⎢1

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Unformatted text preview: 17-7 a. VU = b. EBIT(1 − TC )(1 − Ts ) EBIT(1 − TC ) $2(0.6) = = = $12 million. rsU (1 − Ts ) rsU 0.10 ⎡ (1 − TC )(1 − Ts ) ⎤ VL = VU + ⎢1 − ⎥D (1 − Td ) ⎣ ⎦ ⎡ (0.6)(0.8) ⎤ $10 = $12 + ⎢1 − (0.72) ⎥ ⎣ ⎦ = $12 + [1 - 0.67]$10 = $12 + 0.33($10) = $15.33 million. VL = $15.33 million. Gain from leverage = $3.33 million. c. The gain from leverage under Miller is 0.33($10) = $3.33 million. The gain from leverage in Problem 16-3 is 0.4($10) = $4 million. Thus, the addition of personal tax rates reduced the value of the debt financing. d. VU = VL = $20 million. Gain from leverage = $0.00. e. VU = $12 million. VL = $16 million. Gain from leverage = $4 million. f. VU = $12 million. VL = $16 million. Gain from leverage = $4.0 million. Note that the gain from leverage is the same as in Part (e) and will be the same value, as long as Td = Ts. 17-8 a. VU = $500,000/(rsU – g) = $500,000/(0.13 - 0.09) = 12,500,000. ⎛ 0.07 x 0.40 x 5 million ⎞ b. VL = $12.5 million + ⎜ ⎟ = $16.0 million . So since 0.13 - 0.09 ⎠ ⎝ D = 5, S = 16 – 5 = $11.0 million. 5 = 15.7% rsL = 0.13 + (0.13 − 0.07) 11 c. Under MM, VL = VU + TD = $12.5 million + (0.40)(5 million) = $14.5 million. S = $14.5 – 5 = $9.5 million. rsL = 0.13+(0.13-0.07)(1-.40)(5/9.5) = 14.9% Answers and Solutions: 17 - 7 ...
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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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