Solutons Additonal Capital Structure Problems

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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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