1. TNG Corporation is a manufacturing company, which has acccumulated an net operating loss of $ 2 billion over time. It is considering borrowing $ 5 billion to acquire another company.

a. Based upon the corporate tax rate of 36%, estimate the present value of the tax savings that could accrue to the company.

b. Does the existence of a net operating loss carry forward affect your analysis? (Will the tax benefits be diminished as a consequence?)

. Assess the likelihood that the following firms will be taken over, based upon your understanding of the free cash flow hypothesis.

a. A firm with high growth prospects, good projects, low leverage, and high earnings.

b. A firm with low growth prospects, poor projects, low leverage, and poor earnings.

c. A firm with high growth prospects, good projects, high leverage, and low earnings.

d. A firm with low growth prospects, poor projects, high leverage, and good earnings.

e. A firm with low growth prospects, poor projects, low leverage, and good earnings. You may use a scale ranging from Low to Moderate to High to Highest in providing your assessment.

. Given the following information about the FIN454 Company: the firm that has no debt and has a market value of $100 million and a cost of equity of 11%. Using the Miller-Modigliani model,

a. What happens to the value of the firm as the leverage is changed? (Assume no taxes)

b. What happens to the cost of capital as the leverage is changed? (Assume no taxes)

c. How would your answers to (a) and (b) change if there are taxes?

Governments often step in to protect large companies that get into finanical trouble and bail them out. If this is an accepted practice, what effect would you expect it to have on the debt ratios of firms? Why?

. The Miller-Modigliani model proposes that debt is irrelevant. Under what conditions is this true? If debt is irrelevant, what is the effect of changing the debt ratio on the cost of capital?

Based upon the financing heirarchy described in the textbook, what types of securities would you expect financially strong firms to issue? What about financially weak firms? Why?

Studies indicate that the direct cost of bankruptcy is small. What are the direct costs? What are the indirect costs of bankruptcy? What types of firms are most exposed to these indirect costs

. Debt is always cheaper than equity. Therefore, the optimal debt ratio is all debt. How would you respond?

The BA720 Company has $15 million in pretax income, a tax rate of 30%, and a capital structure mix that is comprised of 78% in equity and 22% million in long term debt [market value basis]. The cost of debt is 9% and cost of equity is 12%.

a) What is the company