My question is Q 15 , M&M and taxes
capital and XYZ Co. are lo debt: its stock is Il equiry ca EBIT w is lve expecting pe of return by have you illustrated we cost of capital yo and there we e corporate tax rate is 9. Homemade Leverage and WACC (LO1 ABC Co. and XYZ firms in all respects except for their capital structure. ABC is lie with 780.000 in stock. XYZ uses both stock and perpetual deh 100000 and the interest rate on its debt is 8 percent. Both firms exe $87.000. Ignore taxes. Rico owns $48,750 worth of XYZ's stock. What rate of return is he h. Show how Rico could generate exactly the same cash flows and ruten investing in ABC and using homemade leverage. c. What is the cost of equity for ABC? What is it for XYZ? d. What is the WACC for ABC? For XYZ? What principle have you illust 10. M&MLO1) Once Bitten Corp. uses no debt. The weighted average is 9.5 percent. If the current market value of the equity is $20.4 million and no taxes, what is EBIT? 11. M&M and Taxes LOQ In the previous question, suppose the corporate la 35 percent. What is EBIT in this case? What is the WACC? Explain. x 12. Calculating W&CC Twice Shy Industries has a debt-equity ratio of 15 WACC is 8.4 percent, and its cost of debt is 5.9 percent. The corporate tax 35 percent. a. What is the company's cost of equity capital? b. What is the company's unleverer cost of equity capital? c. What would the cost of equity be if the debt-equity ratio were 2? What if it we 1.0? What if it were zero? 13. Calculating WACC LOT Braxton Corp. has no debt but can borrow at 6.4 per cent. The firm's WACC is currently 10.2 percent, and the tax rate is 35 percent. a. What is the company's cost of equity? b. If the firm converts to 25 percent debt, what will its cost of equity be? c. If the firm converts to 50 percent debt, what will its cost of equity be? d. What is the company's WACC in part (b)? In part (c)? 14. M&M and Taxes (LO2] Meyer & Co. expects its EBIT to be $83.000 every year forever. The firm can borrow at 8 percent. The company currently has no debt, and its cost of equity is 13 percent. If the tax rate is 35 percent, what is the value of the firm? What will the value be if the company borrows $125,000 and uses the proceeds to repurchase shares? 15. M&M and Taxes (LO2] In Problem 14, what is the cost of equity after recapital- ization? What is the WACC? What are the implications for the firm's capital structure decision? 16. M&M (LO2] Tool Manufacturing has an expected EBIT of $67,000 in perpetuity and a tax rate of 35 percent. The firm has $139,000 in outstanding debt at an interest rate of 6.85 percent, and its unlevered cost of capital is 10.25 percent. What is the value of the firm according to M&M Proposition I with taxes? Should the company change its debt-equity ratio if the goal is to maximize the value of the firm? Explain
