Corporate Finance Berk Demarzo

Advanced corporate finance Assignment set 3 15.19Optimal capital organise with ratees (no MM world!) With its current leverage, Impi corp. get out guard plunder income next course of instruction of $4.5M. If Impis corporate tax rate is 35% and it pays 8% occupyingness on its debt, how practically additional debt give the sack Impi issue this complaisant class and still bring in the benefit of the evoke tax screen next twelvemonth? Net income = after(prenominal) tax income (tax and involvement already paid!). simply interest expenses atomic number 18 tax-deductable so we have to enter the income before taxes, which is (NET INCOME / 0.65 ) = $6.923M. touch expenses are allowed to be $6.923, in that chemise the tax sieve is fully utilized and Impi pays no taxes at all. ($6.923M / 0.08) gives a realizable debt increase of $86.5M. 15.20Optimal capital structure with taxes (no MM world!) Colt Systems go out have EBIT this coming year of $15M. It will also use $6M on total CapEx and increases in NWC, and have $3M in wear and tear expenses. Colt is currently an all-equity firm (VD = 0) with a corporate tax-rate of 35% and a cost of capital of 10%. aIf Colt is expected to grow by 8.5% annually, what is the market value of its equity today? VFirm = VEquity + VDebt, but VDebt = 0, so VFirm=VEquity. We have to fancy Free Cash Flow FCF, which is 15*(1-0.35) 6 + 3 = 7.5M.

The cost of capital is 10%, the festering rate 8.5%, so r g = 1.5%. It is a perpetuity, so 7.5 / ( 0.015) = $ 450M bIf the interest rate on its debt is 8%, how much can Colt lift out now a nd still have non-negative net income this c! oming year? EBIT is already known: $15M. EBIT is the same as income before taxes, because on that point are no interest expenses (all-equity financed!). When the interest rate on debt is 8%, Colt can crystalise zero profit and accordingly maximizing its tax shield by borrowing $15M/0.08 = $187M. But in this case, we assume that CapEx (investments!) are zero. cIs there a tax incentive for Colt to choose a debt-to-value ratio that exceeds 50%? The maximum debt...If you want to get a full essay, narrate it on our website: BestEssayCheap.com

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