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Problem 26-9 "DEAR TUTOR FOR YOUR CONVENIENCE I HA...

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Problem 26-9 "DEAR TUTOR FOR YOUR CONVENIENCE I HAVE ATTACHED A WORD DOCUMENT FOR THIS PROBLEM, IT IS A CLEARER PICTURE OF THE PROBLEM. CAN YOU PLEASE PLACE THE ANSWER ON A EXCEL SPREAD SHEET, AS AS ALWAYS THANK YOU FOR YOUR HELP." MM with and without Taxes International Associates (IA) is about to commence operations as an international trading company. The firm will have book assets of $10 million, and it expects to earn a 18% return on these assets before taxes. However, because of certain tax arrangements with foreign governments, IA will not pay any taxes; that is, its tax rate will be zero. Management is trying to decide how to raise the required $10 million. It is known that the capitalization rate rU for an all-equity firm in this business is 13%, and IA can borrow at a rate rd = 6%. Assume that the MM assumptions apply. According to MM, what will be the value of IA if it uses no debt? Round your answer to the nearest dollar. $ If it uses $6 million of 6% debt? Round your answer to the nearest dollar. $ What are the values of the WACC and rs at debt levels of D = $0, D = $6 million, and D = $10 million? Round your answers to two decimal places. D = $0 WACC % rs % D = $6 million WACC % rs % D = $10 million WACC % rs % What effect does leverage have on firm value? Why? I.Leverage increases firm value because the cost of equity is increasing with leverage, and this increase is not enough to offset the advantage of using lower cost debt financing. II.Leverage has no effect on firm value because the cost of equity is increasing with leverage, and this increase exactly offsets the advantage of using lower cost debt financing. III.Leverage decreases firm value because the cost of equity is increasing with leverage, and this increase more than offsets the advantage of using lower cost debt financing. Assume the initial facts of the problem (rd = 6%, EBIT = $1.8 million, rsU = 13%), but now assume that a 40% federal-plus-state corporate tax rate exists. Use the MM formulas to find the new market values for IA with zero debt and with $6 million of debt. Round your answers to the nearest dollar. Zero debt. $ $6 million of debt. $ What are the values of the WACC and rs at debt levels of D = $0, D = $6 million, and D = $10 million, assuming a 40% corporate tax rate? Round your answers to two decimal places. D = $0 WACC % rs % D = $6 million WACC % rs % D = $10 million WACC % rs % What is the maximum dollar amount of debt financing that can be used? Round your answer to the nearest dollar. $ What is the value of the firm at this debt level? Round your answer to the nearest dollar. $ What is the cost of this debt? %

 

Paper#5597 | Written in 18-Jul-2015

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