Problem_Set__6_Checkpoints (Post-Check)

Problem_Set__6_Checkpoints (Post-Check) - BusM 401 Problem...

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BusM 401 Problem Set #6 Checkpoints Capital Structure Note: These checkpoints are short answers intended to help you check your work as you go along. They are not full solutions, which will be posted on Blackboard after the problem set is turned in. Remember that to get full credit for problem sets you must show all your work, and the answers listed here are usually not sufficient responses to the questions. 1. Haverhill Corporation has net income of $10 million per year on net sales of $100 million per year. It currently has no long-term debt, but is considering a debt issue of $5 million. The interest rate on the debt would be 8%. Haverhill currently faces an effective tax rate of 35%. Assuming this debt is held in perpetuity, what would be the total value of the tax shield to Haverhill if it goes through with the debt issuance? $1,750,000 2. Why does the debt overhang problem make it difficult for firms facing financial distress to finance projects with new equity? 3.
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This note was uploaded on 02/22/2012 for the course BUS M 401 taught by Professor Toddmitton during the Winter '10 term at BYU.

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Problem_Set__6_Checkpoints (Post-Check) - BusM 401 Problem...

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