Exam 15: Debt and Taxes

Use the table for the question(s)below. Consider the following historical top federal tax rates in the United States: Personal Tax Rates -In 2000,assuming an average dividend payout ratio of 50%,the effective tax advantage for debt (t*)was closest to:

Use the following information to answer the question(s)below. Wyatt Oil issued $100 million in perpetual debt (at par)with an annual coupon of 7%.Wyatt will pay interest only on this debt.Wyatt's corporate tax rate is expected to be 21% for the foreseeable future. -Assume that five years have passed since Wyatt issued this debt.While tax rates have remained at 40%,interest rates have dropped so that Wyatt's current cost of debt capital is now only 4%.The present value of Wyatt's annual interest tax shield is now closest to:

Use the table for the question(s)below. Consider the following historical top federal tax rates in the United States: Personal Tax Rates -In 2005,assuming an average dividend payout ratio of 50%,the effective tax advantage for debt (τ*)was closest to:

Consider the following formula: rwacc = rE + rD - rDτc The terms rE + rD represent:

Use the information for the question(s)below. KD Industries has 30 million shares outstanding with a market price of $20 per share and no debt.KD has had consistently stable earnings,and pays a 21% tax rate.Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. -How many shares will KD repurchase in the recapitalization if the share price increases upon announcement and before the recapitalization?

Use the information for the question(s)below. Flagstaff Enterprises expected to have free cash flow in the coming year of $8 million,and this free cash flow is expected to grow at a rate of 3% per year thereafter.Flagstaff has an equity cost of capital of 13%,a debt cost of capital of 7%,and it has a 35% corporate tax rate. -If Flagstaff currently maintains a debt to equity ratio of 1,then Flagstaff's after-tax WACC is closest to:

Which of the following statements is FALSE?

Use the information for the question(s)below. Rosewood Industries has EBIT of $450 million,interest expense of $175 million,and a corporate tax rate of 21%. -Rosewood's net income is closest to:

Use the table for the question(s)below. Consider the following income statement for Kroger Inc.(all figures in $ Millions): -The total amount available to pay out to all the investors in Kroger in 2005 is closest to:

Use the information for the question(s)below. Flagstaff Enterprises expected to have free cash flow in the coming year of $8 million,and this free cash flow is expected to grow at a rate of 3% per year thereafter.Flagstaff has an equity cost of capital of 13%,a debt cost of capital of 7%,and it has a 35% corporate tax rate. -If Flagstaff maintains a .5 debt to equity ratio,then Flagstaff's pre-tax WACC is closest to:

Which of the following equations is INCORRECT?

Raceway Products has a market debt-to-equity ratio of .60,a corporate tax rate of 21%,and pays 8% interest on its debt.The interest tax shield on Raceway's debt lowers its WACC by what amount?

Use the information for the question(s)below. Flagstaff Enterprises expected to have free cash flow in the coming year of $8 million,and this free cash flow is expected to grow at a rate of 3% per year thereafter.Flagstaff has an equity cost of capital of 13%,a debt cost of capital of 7%,and it has a 35% corporate tax rate. -If Flagstaff maintains a debt to equity ratio of 1,then Flagstaff's pre-tax WACC is closest to:

The Grant Corporation is considering permanently adding $500 million of debt to its capital structure.Grant's corporate tax rate is 21% and investors pay a tax rate of 37% on their interest income and 15% on their income from capital gains and dividends.Calculate the present value of the interest tax shield provided by this new debt.

Use the table for the question(s)below. Consider the following historical top federal tax rates in the United States: Personal Tax Rates -In 2005,assuming an average dividend payout ratio of 50%,the effective tax rate for equity holders was closest to:

Consider the following formula: τ* = The term τe is:

Use the table for the question(s)below. Consider the following income statement for Kroger Inc.(all figures in $ Millions): -The interest rate tax shield for Kroger in 2004 is closest to:

Which of the following statements is FALSE?

Use the information for the question(s)below. KD Industries has 30 million shares outstanding with a market price of $20 per share and no debt.KD has had consistently stable earnings,and pays a 35% tax rate.Management plans to borrow $200 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares. -Assume the following tax schedule: Personal Tax Rates Considering the effect of personal taxes,calculate the PV of the interest tax shield provided by KD's recapitalization in 2005.

Use the following information to answer the question(s)below. Google Corporation has no debt on its balance sheet in 2008,but paid $1.6 billion in taxes.Assume that Google's marginal tax rate is 35% and Google's borrowing cost is 7%. -Assume that investors hold Google stock in retirement accounts that are free from personal taxes.If Google were to issue sufficient debt to reduce its taxes by $600 million per year permanently,then the amount that Google needs to borrow is closest to: