Which of the following statements is false? A. There is an important tax advantage to the use of debt financing B. In a market that has taxes as the only market imperfection, if two firms are identical but differ only in their capital structure, then the value of the levered firm is higher than the value of the unlevered firm by the amount of interest tax shield C. To compute the increase in the firm's total value associated with the interest tax shield, we need to forecast a firm's debt and its interest payments D.Given a forecast of a future interest payment, we can determine the interest tax shield and compute its present value by discounting it at a rate that corresponds to its risk ACCM Inc. is considering adding leverage to its capital structure. The firm's managers believe they can issue more debt to exploit the tax benefit of leverage. However, they also recognize that higher debt increases the risk of financial distress. Based on simulation of the firm's future cash flows, the managers have made the following estimates (in millions of dollars) for different levels of debt (96) in the firm capital structure. Debt level 1096 2096 4096 5096 PV(Interest tax shield) 1 2.5 3.75 4.5 5.25 PV(Financial distress cost) 0.5 0.75 2.25 3.1 6.25 30% The optimal capital structure (debt level) of the firm is closest to: O A 2096 B. 30% C. 4096 D. 50% A project manager is evaluating a project and initially forecasts that the project will lasts for four years and has its annual marketing and support costs of $1,000,000 and its annual revenue of $10,000,000. The project pays a 40% tax rate on its pre-tax income and its cost of capital is 15%. While analysing a situation that competitors can run their big promotion programs during the project's life, the manager proposes one solution to the situation by increasing the marketing and support costs by 60% of the originally forecasted level and simultaneously lowering the forecasted revenue by 30% of the originally forecasted level. The change in the net present value (NPV) of the project is closest to: - $6,166,753.26 B. $6,656,717.44 C. -$6,656,717.44 D. $6,166,753.26 Food For Less (FFL), a grocery store, is considering offering one hour photo developing in their store. The firm expects that sales from the new one hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one hour photo sales will be to new customers, FFL estimates that 50% of their current overnight photo customers will switch and use the one hour service. The level of incremental sales associated with introducing the new one hour photo service is closest to: $100,000 $120,000 $130,000 $150,000 Which of the following statements is false? A. There is an important tax advantage to the use of debt financing B. In a market that has taxes as the only market imperfection, if two firms are identical but differ only in their capital structure, then the value of the levered firm is higher than the value of the unlevered firm by the amount of interest tax shield C. To compute the increase in the firm's total value associated with the interest tax shield, we need to forecast a firm's debt and its interest payments D.Given a forecast of a future interest payment, we can determine the interest tax shield and compute its present value by discounting it at a rate that corresponds to its risk ACCM Inc. is considering adding leverage to its capital structure. The firm's managers believe they can issue more debt to exploit the tax benefit of leverage. However, they also recognize that higher debt increases the risk of financial distress. Based on simulation of the firm's future cash flows, the managers have made the following estimates (in millions of dollars) for different levels of debt (96) in the firm capital structure. Debt level 1096 2096 4096 5096 PV(Interest tax shield) 1 2.5 3.75 4.5 5.25 PV(Financial distress cost) 0.5 0.75 2.25 3.1 6.25 30% The optimal capital structure (debt level) of the firm is closest to: O A 2096 B. 30% C. 4096 D. 50% A project manager is evaluating a project and initially forecasts that the project will lasts for four years and has its annual marketing and support costs of $1,000,000 and its annual revenue of $10,000,000. The project pays a 40% tax rate on its pre-tax income and its cost of capital is 15%. While analysing a situation that competitors can run their big promotion programs during the project's life, the manager proposes one solution to the situation by increasing the marketing and support costs by 60% of the originally forecasted level and simultaneously lowering the forecasted revenue by 30% of the originally forecasted level. The change in the net present value (NPV) of the project is closest to: - $6,166,753.26 B. $6,656,717.44 C. -$6,656,717.44 D. $6,166,753.26 Food For Less (FFL), a grocery store, is considering offering one hour photo developing in their store. The firm expects that sales from the new one hour machine will be $150,000 per year. FFL currently offers overnight film processing with annual sales of $100,000. While many of the one hour photo sales will be to new customers, FFL estimates that 50% of their current overnight photo customers will switch and use the one hour service. The level of incremental sales associated with introducing the new one hour photo service is closest to: $100,000 $120,000 $130,000 $150,000
