Borrow 03m at 12 per year thereby mimicking firms a

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borrow $0.3M at 12% per year thereby mimicking Firm’s A capital structure where L = D / V = $30M / $60M = 0.5 implying you have the same risk. You now use the $0.3M + $0.3M = $0.6M to buy $0.6M / $50M = 0.012 or 1.2% of Firm B . In acquiring 1.2% of Firm B, you give up income of 0.01($6.4M) = $64,000 . In turn, you now received 0.012($10M) – 0.012($0.3M) = $0.12M – $0.036 = $0.084M or $84,000 . Thus, with identical risk, you have received an arbitrage profit of $84,000 – $64,000 = $20,000 more per year .] a 52. You are managing an unleveraged firm that pays corporate taxes on its net income (T = 0.4) but operates in an otherwise perfect capital market environment. Your firm has a perpetual expected cash inflow each year () of $300, which can be larger or smaller, but is never less than $50 per year. What is your its expected after-tax net income? a. $180 per year b. $170 per year c. $160 per year d. $150.00 [ ANSWER: Your expected after-tax net income is: (1 – T) = (1 – 0.4)$300 = $180 per year. ] d 53. You are managing a firm that pays corporate taxes on its net income (T = 0.375) but operates in an otherwise perfect capital market environment. Your firm has a perpetual expected cash inflow each year () of $150, which can be larger or smaller, but is never less than $50 per year. Your cost of capital is 12%. What is your net worth? [ Your net worth is $93.75 / 0.12 = $781.25 , compared to $150 / 0.12 = $1,250 value without corporate taxes.] c 54. You are managing an unleveraged firm that pays corporate taxes on its net income (T = 0.4) but operates in an otherwise perfect capital market environment. Your firm has a perpetual expected cash inflow each year () of $1,500. Your cost of capital is 10%. How much would your net worth increase if you did not pay taxes? [ Your net worth is $900 / 0.1 = $9,000, compared to $1,500 / 0.1 = $15,000 value without corporate taxes. Thus, you could increase your net worth by $15,000 – $9,000 = $6,000 .] c 55. You are managing an unleveraged firm that pays corporate taxes on its net income (T = 0.3) but operates in an otherwise perfect capital market environment. Your firm has a perpetual expected cash inflow each year () of $40,000.Your cost of capital is 12%. Suppose your firm borrows $15,000 at 8% per year and gives the $15,000 to the shareholders. Which below statement is true?
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[ Because the interest payments are made before corporate taxes are assessed, the after-tax payment on this debt is only (1 – 0.3)$1,200 = $840 .] b
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