Tax and Gearing

W22Extra Tax and Gearing More Questions twofold Choice 1) Which of the following statements is false? A) In general, the gain to investors from the tax deductibility of touch payments is referred to as the sake tax riddle. B) The interest tax rampart is the extra amount that a loyal would have paid in taxes if it did non have leverage. C) Because Corporations pay taxes on their put ons after interest payments are deducted, interest depreciates reduce the amount of corporate tax firms must(prenominal) pay. D) As Modigliani and Miller make clear in their original work, capital social structure results in perfect capital markets.Thus, if capital structure does not matter, therefore it must stem from a market imperfection. As Modigliani and Miller made clear in their original work, capital structure does not matter in perfect capital markets. Thus, if capital structure matters, past it must stem from a market imperfection. Rosewood Industries has EBIT of $450 billion, in terest expense of $clxxv one one thousand jillion one thousand thousand million, and a corporate tax rate of 35%. 2) Rosewoods net income is nearest to A) $450 million B) $180 million C) $290 million D) $95 million top income = (EBIT engage expense)(1 ?C) = (450 175)(1 . 35) = $178. 75 3) The total of Rosewoods net income and interest payments is nighest to A) $270 million B) $355 million C) $290 million D) $450 million solve income + Interest = (EBIT Interest expense)(1 ? C) = (450 175)(1 . 35) = $178. 75 + $175 = $353. 73 4) If Rosewood had no interest expense, its net income would be closest to A) $405 million B) $160 million C) $450 million D) $290 million Net income = (EBIT Interest expense)(1 ? C) = (450 0)(1 . 35) = $292. 50 5) The amount of Rosewoods interest tax shield is closest to A) $115 million B) $290 millionC) $175 million D) $60 million Interest tax shield = Interest expense(? C) = 175(. 35) = $61. 25 Fly by darkness Aviation (FBNA) expects to ha ve net profit available for shareholders next social class of ? 24 million and Free Cash Flow of ? 27 million. FBNAs fringy corporate tax rate is 40%. 6) Establish FBNAs EBIT A) ? 43 million B) ? 40 Million C) ? 45 million D) ? 60 million EBIT = NI + Taxes + Interest expense FCF = NI + Interest expense = 27 = 24 + interest expense = 3 (EBIT Interest Expense)(1 0. ) = NI (EBIT 3)(0. 6) = 24 (EBIT 3) = 24/0. 6 = 40 EBIT = 40 + 3 = $43 7) IF FBNA increases leverage so that its interest expense rises by ? 1 million, then the amount its profit for shareholders will variegate is closest to A) -? 400,000 B) -? 600,000 C) ? 400,000 D) ? 600,000 (EBIT Interest Expense chg IE)(1 0. 4) = NI + chg NI (- chg IE)(0. 6) = chg NI -1m (. 6) = -600,000 Or, -$1m (1 . 4) = -$600,000 8) IF FBNA increases leverage so that its interest expense rises by ? 1 million, then the amount its Free Cash flow will change is closest to A) -? 600,000 B) -? 400,000C) ? 600,000 D) ? 400,000 FCF = NI + Intere st expense chg FCF = chg NI + chg Interest expense = 600,000 + 1m = +400,000 Or, $1m (0. 4) = $400,000 LCMS Industries has ? 70 million in debt outstanding. The firm will pay save interest on this debt (the debt is perpetual). LCMS marginal tax rate is 35% and the firm pays a rate of 8% interest on its debt. 9) LCMS annual interest tax shield is closest to A) ? 2. 8 million B) ? 2. 0 million C) ? 3. 6 million D) ? 5. 6 million Annual Tax shield= annual debt interest ? C = ? 70M ? 0. 08 ? .35 = 1. 96M 10) Assuming that the risk is the same as the loan, the present value of LCMS interest tax shield is closest to A) ? 45. 5 million B) ? 20. 0 million C) ? 24. 5 million D) ? 35. 0 million PV of Tax shield = debt ? ?C = ? 70M ? .35 = 24. 5M 11) Assuming that the risk of the tax shield is only 6% even though the loan pays 8%, then the present value of LCMS interest tax shield is closest to A) ? 24. 5 million B) ? 18 million C) ? 33. 0 million D) ? $20. 0 million PV of Tax shield = debt ? ?C ? rD / rD2 = $70M ? .35 ? .08/. 06 = 32. 67