Exam 15: Debt and Taxes

Nielson Motors has no debt,and maintains a policy of holding $80 million in excess cash reserves,invested in risk-free treasury securities currently yielding 3%.If Nielson has a 21% corporate tax rate,the cost of permanently maintaining this $80 million reserve is closest to:

Use the information for the question(s)below. Shepard Industries expects free cash flow of $10 million each year.Shepard's corporate tax rate is 21%,and its unlevered cost of equity is 10%.The firm also has outstanding debt of $40 million and it expects to maintain amount of debt permanently. -The value of Shepard Industries with leverage is closest to:

MJ Enterprises has 50 million shares outstanding with a market price of $25 per share and no debt.MJ has had consistently stable earnings,and pays a 21% tax rate.Management plans to borrow $500 million on a permanent basis through a leveraged recapitalization in which they would use the borrowed funds to repurchase outstanding shares.Calculate MJ's share price following announcement of the recapitalization plan.

Which of the following statements is FALSE?

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 .5 debt to equity ratio,then Flagstaff's after-tax WACC is closest to:

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 2006 is 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,the effective tax rate for debt holders was closest to:

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. -After the recapitalization,the total value of KD as a levered firm 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 currently maintains a .5 debt to equity ratio,then the value of Flagstaff's interest tax shield is closest to:

Use the information for the question(s)below. Fly by Night Aviation (FBNA)expects to have net income next year of $24 million and interest expense of $3 million.FBNA's corporate tax rate is 21%. -IF FBNA increases leverage so that its interest expense rises by $1 million,then the amount its unlevered EBIT will change is closest to:

Use the information for the question(s)below. Fly by Night Aviation (FBNA)expects to have net income next year of $24 million and interest expense of $3 million.FBNA's corporate tax rate is 21%. -IF FBNA increases leverage so that its interest expense rises by $1 million,then the amount its net income will change is closest to:

Use the table for the question(s)below. Consider the following income statement for Kroger Inc.(all figures in $ Millions): -The income that would be available to equity holders in 2006 if Kroger was not levered is closest to:

Which of the following statements is FALSE?

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

Use the information for the question(s)below. LCMS Industries has $70 million in debt outstanding.The firm will pay only interest on this debt (the debt is perpetual).LCMS' corporate tax rate is 21% and the firm pays a rate of 8% interest on its debt. -LCMS' annual interest tax shield is closest to:

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%. -If Rosewood had no interest expense,its net income would be closest to:

Use the table for the question(s)below. Consider the following income statement for Kroger Inc.(all figures in $ Millions): -The income that would be available to equity holders in 2005 if Kroger was not levered is closest to:

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 in Google pay a 15% tax rate on income from equity and a 35% tax rate on interest income.If Google were to issue sufficient debt to reduce its corporate taxes by $1 billion per year permanently,then the value that would be created is closest to:

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%. -The total of Rosewood's net income and interest payments is closest to:

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. -After the recapitalization,the value of KD's levered equity is closest to: