Corporate Finance Berk Demarzo

Advanced corporate finance Assignment set 3 15.19Optimal capital organise with ratees (no MM world!) With its current leverage, Impi corp. pass on guard lucre income next course of instruction of $4.5M. If Impis corporate tax rate is 35% and it pays 8% occupy group on its debt, how practically additional debt basin Impi issue this social class and still bring in the benefit of the affaire group tax shield next twelvemonth? Net income = afterwards tax income (tax and interest already paid!). simply interest expenses be tax-deductable so we have to enter the income before taxes, which is (NET INCOME / 0.65 ) = $6.923M. cheer expenses are allowed to be $6.923, in that chemise the tax shield is fully utilized and Impi pays no taxes at all. ($6.923M / 0.08) gives a affirmable debt increase of $86.5M. 15.20Optimal capital structure with taxes (no MM world!) Colt Systems go away have EBIT this coming year of $15M. It will also extend $6M on total Cap Ex and increases in NWC, and have $3M in derogation expenses. Colt is currently an all-equity firm (VD = 0) with a corporate tax-rate of 35% and a cost of capital of 10%. aIf Colt is expected to grow by 8.5% annually, what is the market value of its equity today? VFirm = VEquity + VDebt, but VDebt = 0, so VFirm=VEquity. We have to fancy Free Cash Flow FCF, which is 15*(1-0.35) 6 + 3 = 7.5M.

The cost of capital is 10%, the increment rate 8.5%, so r g = 1.5%. It is a perpetuity, so 7.5 / ( 0.015) = $ 450M bIf the interest rate on its debt is 8%, how much can Colt lift out now and still have non-negative net income this coming year? EBIT is already k! nown: $15M. EBIT is the same as income before taxes, because on that point are no interest expenses (all-equity financed!). When the interest rate on debt is 8%, Colt can gravel zero profit and accordingly maximizing its tax shield by borrowing $15M/0.08 = $187M. But in this case, we assume that CapEx (investments!) are zero. cIs there a tax incentive for Colt to choose a debt-to-value ratio that exceeds 50%? The maximum debt...If you want to get a full essay, narrate it on our website: BestEssayCheap.com

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