i What is the value of the tax shield that the firm acquires through the bond

# I what is the value of the tax shield that the firm

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(i) What is the value of the tax shield that the firm acquires through the bond issue? tax shield 1000000*30* \$ 300,000.00 V L = EBIT / K o V L = V U + (T CD – K d ) X V L = 25,000,000 V L = 10,000,000 R E = 15,000,000 R e = R e = 2,000,000 – 1,000,000 X 6.5% R e = 9% (iii) If taxes were paid of 30% what is the value of the firm after restructuring? Vu = \$2m x 0.7 / 0.08 = \$17.5m V L = V U + TCD V L = 17,500,000 + 10,000,000 V L = 20,500,000 An all-equity firm is subject to a 30% tax rate. Its total market value is initially \$3. to issue \$1 million worth of bonds at 10% interest and to use the proceeds to buy

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(ii) According to M&M, what is the likely increase in market value per share of the fir increase in market value share = 300000/175000 1.7143 (iii) How many shares will the company be able to repurchase? new market value per share = (3500000 + 300000)/175000 = 21.714 number of shares company will be able to repurchase = 1000000/21.7143 = 46052 i. PAT = (10m-50m*6%) *(1-0.28) = 5.04m value of magnus= (5.04/12%) - 10m = 32m Magnus Inc. has earnings before interest and tax (EBIT) of \$10 million. There is required rate of return on assets in the industry is 12%. The corporate tax rate is assuming that the present value of bankruptcy costs is \$10 million.
reased in the balance sheet. possibility of getting disproportionate losses as associated expense amount ca convert APC from its current all-equity structure to one that includes some financial leverage. Cu te of 6.50% and then use the proceeds to repurchase shares at \$50 per share. Assume there are price (1 mark) and the debt to equity ratio shareholders. ce assets and operations of the company. It signals the capability ease in debt equity ratio represents that company is increasingly ter risk of defaults in interest and loan repayment and possibility equity also changes proportionately so that lenders and equity. In combination this represents cost of capital. Higher debt mpany to earn the disproportionate amount on the assets which it purchases. rm or maximises the cost of capital. The foremost objective of a corporate is to maximise

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after EBIT \$60m Interest @6.5% 6.5m Earnings \$53.5m ) before the repurchase transaction? ter the repurchase transaction? urn of 6%. The required return on assets in this industry is 12 % and the corporate tax ra erest and taxes (EBIT) of \$250,000. Assume that the required return on assets for this in 5% and uses the proceeds to repurchase outstanding stock.
Assume that the required return on assets for firms in this industry is 8%. The firm issues rk) before the repurchase transaction according M&M proposition I? maining stock after the repurchase transaction, according to M&M Proposition II? ? .5 million and there are 175,000 shares outstanding. The firm announces a programme y back common stock.

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rm after the announcement (assuming efficient markets)? 43 2.64 \$50 million of debt outstanding with a required rate of return of 6%. The s 28%. There are no personal taxes. Compute the value of Magnus
an overwhelm the firm if it doesn't earn enough returns which can be used urrently APC has 12 million shares of common stock outstanding which are selling for \$50.00 e no market frictions such as corporate or personal taxes.

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