Exam 15: Debt and Taxes

Rearden Metal has no debt,and maintains a policy of holding $50 million in excess cash reserves,invested in risk free treasury securities currently yielding 4%.If Rearden is in the 40% marginal tax bracket,the cost of permanently maintaining this $50 million reserve is closest to:

If Flagstaff currently maintains a .5 debt to equity ratio,then the value of Flagstaff's interest tax shield is closest to:

Which of the following statements is FALSE?

With its current leverage,WELS Corporation will have Free Cash Flow of $4 million.If WELS corporate tax rate is 35% and it pays 8% interest on its debt,how much additional debt can WELS issue this year and still receive the benefit of the interest tax shield next year?

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 is in the 35% corporate tax bracket. -If Flagstaff currently maintains a .8 debt to equity ratio,then calculate the value of Flagstaff's interest tax shield.

Which of the following statements is FALSE?

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 $1 billion per year permanently,then the value that would be created is closest to:

Which of the following statements is FALSE?

If Flagstaff currently maintains a debt to equity ratio of 1,then Flagstaff's after-tax WACC is closest to:

The interest rate tax shield for Kroger in 2004 is closest to:

Assume that the corporate tax rate is 40%,the personal tax rate on income from equity is 20% and the personal rate on interest income is 36%.The effective tax advantage of a corporate issuing debt would be closest to:

In 2000,assuming an average dividend payout ratio of 50%,the effective tax advantage for debt (t*)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 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. -The value of KD's unlevered equity is closest to:

In 2005,assuming an average dividend payout ratio of 50%,the effective tax advantage for debt (τ*)was closest to:

Use the table for the question(s)below. Consider the following income statement for Kroger Inc.(all figures in $ Millions): -Calculate the interest tax shield,the total amount available to payout to all the investors,and the income that would be available to equity holders if Kroger was not levered for the year 2004.

Assume that investors in Google pay a 15% tax rate on income from equity and a 25% tax rate on interest income.If Google were to issue sufficient debt to reduce its taxes by $600 million per year permanently,then the effective tax advantage of this debt would be closest to:

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:

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:

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:

Raceway Products has a market debt-to-equity ratio of .60,a corporate tax rate of 40%,and pays 8% interest on its debt.The interest tax shield on Raceway's debt lowers its WACC by what amount?