QUESTION $1$

Your firm currently has $ $120$ million in debt outstanding with a $8\%$ interest rate. The terms of the loan require the firm to repay $ $30$ million of the balance each year. Suppose that the marginal corporate tax rate is $30\%,$ and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt?

QUESTION $2$

Rogot Instruments makes fine violins and cellos. It has $$$$1\mathrm{.}9$ million in debt$$ outstanding, equity valued at $$$$2\mathrm{.}1$ million and pays corporate income tax at rate $21\%.$ Its cost of equity is $11\%$ and its cost of debt is $6\%.$

a$.$ What is$$ Rogot's pretax$$ WACC?

b$.$ What is$$ Rogot's $($effective$$ after$-$tax$)$ WACC?

QUESTION $3$

$$PMF$,$ Inc., can deduct interest expenses next year up to$30\%$ of EBIT. This limit is equally likely to be $ $17$million$,$ $ $27$million$,$ or $ $37$ million. Its corporate tax rate is $38\%,$ and investors pay a $30\%$ tax rate on income from equity and a $32\%$ tax rate on interest income.

a$.$ What is the effective tax advantage of debt if PMF has interest expenses of $$$$14$ million this coming$$ year?

b$.$ What is the effective tax advantage of debt for interest expenses in excess of $ $37$million$?($Ignore$$ carryforwards$).$

c$.$ What is the expected effective tax advantage of debt for interest expenses between $ $17$ million and $ $27$million$?($Ignore$$ carryforwards$).$

d$.$ What level of interest expense provides PMF with the greatest tax$$ benefit?