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Unformatted text preview: Year 1 2 3 4 5 Debt 100 75 50 25 Interest 10 7.5 5 2.5 Tax Shield 4 3 2 1 PV $8.30 3. Milton Industries expects free cash flow of $5 million each year. Miltons corporate tax rate is 35%, and its unlevered cost of capital is 15%. The firm also has outstanding debt of $19.05 million, and it expects to maintain this level of debt permanently. a) What is the value of Milton Industries without leverage? V U =5/0.15=$33.33M b) What is the value of Milton Industries with leverage? V L = V U +r C D=33.33+0.35*19.05=$40M 4. With its current leverage, Impi Corporation will have net income next year of $4.5 million. If Impis corporate tax rate is 35% and it pays 8% interest on its debt, how much additional debt can Impi issue this year and still receive the benefit of the interest tax shield next year? Net income of $4.5 million; 4.5/1-0.35=$6.923M in taxable income. The corporation can increase its interest expenses by $6.923M. 6.923/0.08=$86.5M...
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- Summer '08