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Question 1 (2 points): The Domer Company expects to earn $ 300 million before interest and taxes this year. It will have an interest expense
Question 1 (2 points): The Domer Company expects to earn $ 300 million before interest and taxes this year. It will have an interest expense of $ 75 million on debt and the corporate tax rate is 20%. The closest estimate for the Domer's Company tax shield this year is: a. $ 225 million b. $ 75 million c. $ 90 million d. $ 15 million e. None of the above Question 2 (2 points): Wind Farms borrows $ 100 million in perpetuity at a 6% annual risk free rate. Wind Farms only pays annual interest on the debt and Wind Farms' corporate tax rate now and in the future is 21%. The present value of Wind Farm's annual interest tax shield is: (closest answer): a. $ 20 million b. $ 21 million c. $ 6 million d. $ 60 million e. None of the above Question 3 (2 points): The Clover Co. is an all equity firm with a total value of $ 500 million and with a cost of equity of 10%. The Clover Co. decides to borrow $ 100 million in perpetuity at a 6% annual risk free rate and use proceeds to repurchase shares. The Clover Co will only pay annual interest on the debt and the corporate tax rate now and in the future is 21%. What is the cost of equity of the levered equity? a. 9.75% b. 10% c. 10.75% d. 12% e. None of the above
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