Solutons Additonal Capital Structure Problems

Solutons Additonal Capital Structure Problems - Solutions...

Info icon This preview shows page 1. Sign up to view the full content.

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
Image of page 1
This is the end of the preview. Sign up to access the rest of the document.

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....
View Full Document

  • Fall '12
  • Bizjak
  • Finance, Debt, savings, tax savings, annual tax savings

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern