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Exam 15: Debt and Taxes

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Question 51

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Use the information for the question(s) below. LCMS Industries has $70 million in debt outstanding. The firm will pay only interest on this debt (the debt is perpetual) . LCMS' marginal tax rate is 35% and the firm pays a rate of 8% interest on its debt. -LCMS' annual interest tax shield is closest to:

A) $2.8 million
B) $2.0 million
C) $3.6 million
D) $5.6 million

E) A) and B)
F) C) and D)

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Question 52

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Use the information for the question(s)below. KD Industries has 30 million shares outstanding with a market price of $20 per share and no debt. KD has had consistently stable earnings, and pays a 35% tax rate. Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. -Assume the following tax schedule: Personal Tax Rates Considering the effect of personal taxes, calculate the PV of the interest tax shield provided by KD's recapitalization in 2005.

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The average personal tax rate ...

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Question 53

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Use the following information to answer the question(s) below. Google Corporation has no debt on its balance sheet in 2008, but paid $1.6 billion in taxes. Assume that Google's marginal tax rate is 35% and Google's borrowing cost is 7%. -Assume that investors in Google pay a 15% tax rate on income from equity and a 35% tax rate on interest income. If Google were to issue sufficient debt to reduce its corporate taxes by $1 billion per year permanently, then the value that would be created is closest to:

Which of the following statements is FALSE?

Use the information for the question(s) below. Rosewood Industries has EBIT of $450 million, interest expense of $175 million, and a corporate tax rate of 35%. -The total of Rosewood's net income and interest payments is closest to:

Use the following information to answer the question(s) below. Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon of 7%. Wyatt will pay interest only on this debt. Wyatt's marginal tax rate is expected to be 40% for the foreseeable future. -Nielson Motors has no debt, and maintains a policy of holding $80 million in excess cash reserves, invested in risk free treasury securities currently yielding 3%. If Nielson is in the 35% marginal tax bracket, the cost of permanently maintaining this $80 million reserve is closest to:

Use the following information to answer the question(s) below. Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon of 7%. Wyatt will pay interest only on this debt. Wyatt's marginal tax rate is expected to be 40% for the foreseeable future. -The present value of Wyatt's annual interest tax shield is closest to:

Use the following information to answer the question(s) below. Google Corporation has no debt on its balance sheet in 2008, but paid $1.6 billion in taxes. Assume that Google's marginal tax rate is 35% and Google's borrowing cost is 7%. -Assume that investors hold Google stock in retirement accounts that are free from personal taxes. If Google were to issue sufficient debt to reduce its taxes by $600 million per year permanently, then the value that would be created is closest to:

Use the information for the question(s)below. Flagstaff Enterprises expected to have free cash flow in the coming year of $8 million, and this free cash flow is expected to grow at a rate of 3% per year thereafter. Flagstaff has an equity cost of capital of 13%, a debt cost of capital of 7%, and it is in the 35% corporate tax bracket. -Your firm currently has $250 million in debt outstanding with an 8% interest rate. The terms of the loan require the firm to repay $50 million of the balance each year. Suppose that the marginal corporate tax rate is 35% and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt?

With its current leverage, WELS Corporation will have Free Cash Flow of $4 million. If WELS corporate tax rate is 35% and it pays 8% interest on its debt, how much additional debt can WELS issue this year and still receive the benefit of the interest tax shield next year?

Use the information for the question(s) below. Flagstaff Enterprises expected to have free cash flow in the coming year of $8 million, and this free cash flow is expected to grow at a rate of 3% per year thereafter. Flagstaff has an equity cost of capital of 13%, a debt cost of capital of 7%, and it is in the 35% corporate tax bracket. -If Flagstaff currently maintains a .5 debt to equity ratio, then the value of Flagstaff's interest tax shield is closest to:

Which of the following statements is FALSE?

Use the following information to answer the question(s) below. Google Corporation has no debt on its balance sheet in 2008, but paid $1.6 billion in taxes. Assume that Google's marginal tax rate is 35% and Google's borrowing cost is 7%. -Assume that investors in Google pay a 15% tax rate on income from equity and a 35% tax rate on interest income. If Google were to issue sufficient debt to reduce its taxes by $1 billion per year permanently, then the effective tax advantage of this debt would be closest to:

Use the information for the question(s) below. Flagstaff Enterprises expected to have free cash flow in the coming year of $8 million, and this free cash flow is expected to grow at a rate of 3% per year thereafter. Flagstaff has an equity cost of capital of 13%, a debt cost of capital of 7%, and it is in the 35% corporate tax bracket. -If Flagstaff currently maintains a debt to equity ratio of 1, then Flagstaff's after-tax WACC is closest to:

Consider the following formula: r_wacc = r_E + r_D - r_Dτ_c The term r_Dτ_c represents: