# Solutons Additonal Capital Structure Problems - Solutions...

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Solutions to Additional Problems Capital Structure 1. a. Annual tax savings from debt = \$ 40 million * .09 * .35 = \$ 1.26 b. PV of Savings assuming savings are permanent = \$ 40 million × .35 = \$ 14.00 c. PV of Savings assuming savings occur for 10 years = \$ 8.09. This is the present value of an annuity of \$1.26 discounted at 9% d. PV of Savings will increase since the amount of interest stays and tax savings stays constant but
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Unformatted text preview: the discount rate would fall. If savings are permanent = 1.26/.07 = \$ 18.00 If savings are for 10 years = \$ 8.85 2. After the debt is issued, but before the stock is repurchased, the value of the firm is: V L = V U + T C D = \$100,000 + .34(\$30,000) = \$110,200 Each share is worth \$110,200/5,000 = \$22.04 Repurchase \$30,000/\$22.04 = 1,361 shares 3. V L = V U + T C D = (\$200,000)(.6)/(0.15) + .4(\$1M) = 1.2M....
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• Fall '12
• Bizjak
• Finance, Debt, savings, tax savings, annual tax savings

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