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Problem Set 6

# Problem Set 6 - of the tax shield to Haverhill if it goes...

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BusM 401 Problem Set #6 Capital Structure Instructions: Complete all questions. This problem set is worth 10 points. Problems sets are graded on effort and completeness; you must show your work in order to get full credit. Short answers (“checkpoints”) are available for some questions on Blackboard so that you can check your answers. Full solutions are available on Blackboard after the problem set is due. (Some full answers are found in the back of Higgins; it’s best not to look at these until you have tried your best to answer the question.) You're going to like this one. 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

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Unformatted text preview: of the tax shield to Haverhill if it goes through with the debt issuance? 2. Why does the debt overhang problem make it difficult for firms facing financial distress to finance projects with new equity? 3. Do Higgins Chapter 6, #5. 4. Do Higgins, Chapter 6, #14. Do only parts a, b, c, f, g. (Studying past annual reports, as suggested in the problem, might be useful for part f, if you want to assess the volatility of Avon’s cash flow.) 5. Look up financial statements and compare some leverage ratios for Boeing and Oracle for fiscal year end 2008. Calculate at least the following ratios: Net Income/Interest Expense (Interest Coverage), Total Liabilities/Total Assets, and Long-term Debt/Equity. a. Which company has the higher financial leverage? b. Given the nature of these companies' operations and assets, which would you expect to exhibit higher leverage? Why? 2...
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Problem Set 6 - of the tax shield to Haverhill if it goes...

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