Chapter18_xlsSol

# Chapter18_xlsSol - Problems Problem 18-14 Problem 18-16...

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Problems Problem 18-14 Problem 18-16 Problem 18-18 Problem 18-23 Problem 18-25

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Problem 18-14 a. Using the information provided, fill in the table below: Debt-Equity Debt Cost Equity Cost Weighted Average Ratio of Capital of Capital Cost of Capital Before Change in Capital Structure 0 N/A After Change in Capital Structure 0.30 6.5% b. Corporate tax rate 0.35 Risk free rate of interest 0.05 Expected return on the market 0.11 Expected annual cash flow (millions) 25.00 a. b. Debt-Equity Debt Cost Levered Equity Cost Weighted Average Firm Value Present Value of Ratio of Capital Beta of Capital Cost of Capital (millions) Interest Tax Shield Before Change in Capital Structure 0.00 1.50 14.00% 14.00% 178.57 After Change in Capital Structure 0.30 0.07 1.92 16.25% 13.48% 185.53 6.96 Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.50. For each year into the indefinite future, Remex’s free cash flow is expected to equal \$25 million. Remex is considering changing its capital structure by issuing debt and using the proceeds to buy back stock. It will do so in such a way that it will have a 30% debt-equity ratio after the change, and it will maintain this debt-equity ratio forever. Assume that the required (i.e., expected) return on the debt Remex will be issuing is 6.5%. Remex faces a corporate tax rate of 35%. Except for the corporate tax rate of 35%, there are no market imperfections. Assume that the CAPM holds, the risk-free rate of interest is 5%, and the expected return on the market is 11%. Using the information provided and your calculations in part (a), determine the value of the tax shield acquired by Remex if it changes its capital structure in the way it is considering.
Problem 18-16 0 1 2 3 4 EBIT 10.0 10.0 10.0 10.0 Interest (5%) -4.0 -4.0 -3.0 -2.0 Earnings Before Taxes 6.0 6.0 7.0 8.0 Taxes -2.4 -2.4 -2.8 -3.2 Depreciation 25.0 25.0 25.0 25.0 Cap Ex -100.0 Additions to NWC -20.0 20.0 Net New Debt 80.0 0.0 -20.0 -20.0 -40.0 FCFE -40.0 28.6 8.6 9.2 9.8 NPV at 11% Equity Cost of Capital 5.9 a. What is the present value of the interest tax shield associated with this project?

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Chapter18_xlsSol - Problems Problem 18-14 Problem 18-16...

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