Subject: Corporate Finance

Topic: Debt and Taxes

8. Milton Industries expects free cash flow of $9 million each year. Milton's corporate tax rate is 40%, and its levered cost of capital is 13%. Milton also has outstanding debt of $18.66 million, and it expects to maintain this level of debt permanently.

a.Milton Industries' value without leverage is $__________ million. (Round to two decimal places.)

b.Milton Industries' value with leverage is $__________ million. (Round to two decimal places.)

9.Markum Enterprises is considering permanently adding an additional $112 million of debt to its capital structure. Markum's corporate tax rate is 35%.

a.Absent personal taxes, the value of the interest tax shield from new debt is $__________ million. (Round to two decimal places.)

b.If investors pay a tax rate of 35% on interest income, and a tax rate of 25% on income from dividends and capital gains, the value of the interest tax shield from new debt is

$__________ million. (Round to two decimal places.)

10.With its current leverage, Arundel Corp. will have net income next year of $7 million. If Arundel's corporate tax rate is 35%, and it pays 6% interest on its debt, the additional debt Arundel can issue this year and still receive the benefit of the interest tax shield next year is

$__________ million. (Round to three decimal places.)