(d) Suppose the firm anticipates that 30% of the rights will not be exercised. W

Question

(d) Suppose the firm anticipates that 30% of the rights will not be exercised. What should the issue price be if the other issue terms stay the same and the firm wants to raise the same amount of money? 4. If a firm borrows permanently $25 Million at an interest rate of 7%. what is the present value of the interest tax shield? If a firm borr $25 Million for one year at an interest rate of 8%, what is the present value of the interest tax shield? (Assume the corporate tax rate Tc 0.35) 5. A firm is proposing to undertake a scale expansion. It would cost $40 million and produce an expected cash flow of $5 million a year in perpetuity before it is taxed at the corporate rate of 34%. The firm is financed 40% by debt. The expected return on the firm's equity is 20% ows

Explanation / Answer

4) For permanent debt, interest tax shield = Debt x Tax rate = 25 x 35% = 8.75 million

For one year debt, interest tax shield = Interest payment x Tax rate = 25 x 8% x 35% = 0.70 million

Related Questions

Navigate

• Browse (All)
• Browse #
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.