Answered step by step
Verified Expert Solution
Question
1 Approved Answer
7. (3 points) Bay Transport Systems (BTS) currently has $30 million in debt outstanding. In addition to 6.5% interest, it plans to repay 5% of
7. (3 points) Bay Transport Systems (BTS) currently has $30 million in debt outstanding. In addition to 6.5% interest, it plans to repay 5% of the remaining balance each year. If BTS has a marginal corporate tax rate of 25%, and if the interest tax shields have the same risk as the loan, what is the present value of the interest tax shield from the debt? 8. (8 points) Kurz Manufacturing is currently an all-equity firm with 20 million shares outstanding and a stock price of $7.50 per share. Although investors currently expect Kurz to remain an all-equity firm, Kurz plans to announce that it will borrow $50 million and use the funds to repurchase shares. Kurz will pay interest only on this debt, and it has no further plans to increase or decrease the amount of debt. Kurz is subject to a 25% corporate tax rate. (a) What is the market value of Kurz's existing assets before the announcement? (b) What is the market value of Kurz's assets (including any tax shields) just after the debt is issued, but before the shares are repurchased? (c) What is Kurz's share price just before the share repurchase (after the debt is issued)? How many shares will Kurz repurchase? (d) What are Kurz's market value balance sheet and share price after the share repurchase
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started