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Financial Management 2017 - Quiz and Case Study Guides - Corporate Finance, 4e (Berk / DeMarzo) - Quiz - Chapter 15

Financial Management 2016 - 2017

FINANCIAL MANAGEMENT 2017 - QUIZ AND CASE STUDY GUIDES

Corporate Finance, 4e (Berk / DeMarzo)

Chapter 15   Debt and Taxes

 

 

Corporate Finance, 4e (Berk / DeMarzo)

Chapter 15   Debt and Taxes

 

15.1   The Interest Tax Deduction

 

1) Which of the following statements is FALSE?

  1. A) In general, the gain to investors from the tax deductibility of interest payments is referred to as the interest tax shield.
  2. B) The interest tax shield is the additional amount that a firm would have paid in taxes if it did not have leverage.
  3. C) Because Corporations pay taxes on their profits after interest payments are deducted, interest expenses reduce the amount of corporate tax firms must pay.
  4. D) As Modigliani and Miller made clear in their original work, capital structure matters in perfect capital markets. Thus, if capital structure does not matter, then it must stem from a market imperfection.

Answer:  D

Explanation:  D) As Modigliani and Miller made clear in their original work, capital structure does not matter in perfect capital markets.  Thus, if capital structure matters, then it must stem from a market imperfection.

Diff: 1

Section:  15.1 The Interest Tax Deduction

Skill:  Conceptual

 


Use the table for the question(s) below.

 

Consider the following income statement for Kroger Inc. (all figures in $ Millions):

 

Year

2006

2005

2004

Total Sales

60,553

56,434

53,791

Cost of goods sold

45,565

42,140

39,637

Selling, general & admin expenses

11,688

12,191

11,575

Depreciation

1265

1256

1209

Operating Income

2035

847

1370

Other Income

0

0

0

EBIT

2035

847

1370

Interest expense

510

557

604

Earnings before tax

1525

290

766

Taxes (35%)

534

102

268

Net Income

991

189

498

 

2) The interest rate tax shield for Kroger in 2006 is closest to:

  1. A) $187 million
  2. B) $332 million
  3. C) $534 million
  4. D) $179 million

Answer:  D

Explanation:  D)

Year

2006

2005

2004

Total Sales

60,553

56,434

53,791

Cost of goods sold

45,565

42,140

39,637

Selling, general & admin expenses

11,688

12,191

11,575

Depreciation

1265

1256

1209

Operating Income

2035

847

1370

Other Income

0

0

0

EBIT

2035

847

1370

Interest expense

510

557

604

Earnings before tax

1525

290

766

Taxes (35%)

534

102

268

Net Income

991

189

498

 

 

 

 

Tax Shield = .35 × Interest Exp

178.5

194.95

211.4

Diff: 1

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

 

 

3) The interest rate tax shield for Kroger in 2005 is closest to:

  1. A) $362 million
  2. B) $36 million
  3. C) $102 million
  4. D) $195 million

Answer:  D

Explanation:  D)

Year

2006

2005

2004

Total Sales

60,553

56,434

53,791

Cost of goods sold

45,565

42,140

39,637

Selling, general & admin expenses

11,688

12,191

11,575

Depreciation

1265

1256

1209

Operating Income

2035

847

1370

Other Income

0

0

0

EBIT

2035

847

1370

Interest expense

510

557

604

Earnings before tax

1525

290

766

Taxes (35%)

534

102

268

Net Income

991

189

498

 

 

 

 

Tax Shield = .35 × Interest Exp

178.5

194.95

211.4

Diff: 1

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

 

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

  1. A) $268 million
  2. B) $393 million
  3. C) $211 million
  4. D) $94 million

Answer:  C

Explanation:  C)

Year

2006

2005

2004

Total Sales

60,553

56,434

53,791

Cost of goods sold

45,565

42,140

39,637

Selling, general & admin expenses

11,688

12,191

11,575

Depreciation

1265

1256

1209

Operating Income

2035

847

1370

Other Income

0

0

0

EBIT

2035

847

1370

Interest expense

510

557

604

Earnings before tax

1525

290

766

Taxes (35%)

534

102

268

Net Income

991

189

498

 

 

 

 

Tax Shield = .35 × Interest Exp

178.5

194.95

211.4

Diff: 1

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

 

5) The total amount available to payout to all the investors in Kroger in 2006 is closest to:

  1. A) $990 million
  2. B) $1525 million
  3. C) $1500 million
  4. D) $2035 million

Answer:  C

Explanation:  C)

Year

2006

2005

2004

Total Sales

60,553

56,434

53,791

Cost of goods sold

45,565

42,140

39,637

Selling, general & admin expenses

11,688

12,191

11,575

Depreciation

1265

1256

1209

Operating Income

2035

847

1370

Other Income

0

0

0

EBIT

2035

847

1370

Interest expense

510

557

604

Earnings before tax

1525

290

766

Taxes (35%)

534

102

268

Net Income

991

189

498

 

 

 

 

Tax Shield = .35 × Interest Exp

178.5

194.95

211.4

 

 

 

 

Total available to all investors Interest expense + net income

1501

746

1102

 

 

 

 

Total available to S.H. if  no leverage = EBIT(1 - 0.35)

1322.75

550.55

890.5

Diff: 1

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

 

6) The total amount available to payout to all the investors in Kroger in 2005 is closest to:

  1. A) $190 million
  2. B) $847 million
  3. C) $745 million
  4. D) $290 million

Answer:  C

Explanation:  C)

Year

2006

2005

2004

Total Sales

60,553

56,434

53,791

Cost of goods sold

45,565

42,140

39,637

Selling, general & admin expenses

11,688

12,191

11,575

Depreciation

1265

1256

1209

Operating Income

2035

847

1370

Other Income

0

0

0

EBIT

2035

847

1370

Interest expense

510

557

604

Earnings before tax

1525

290

766

Taxes (35%)

534

102

268

Net Income

991

189

498

 

 

 

 

Tax Shield = .35 × Interest Exp

178.5

194.95

211.4

 

 

 

 

Total available to all investors Interest expense + net income

1501

746

1102

 

 

 

 

Total available to S.H. if  no leverage = EBIT(1 - 0.35)

1322.75

550.55

890.5

Diff: 1

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

 

7) The income that would be available to equity holders in 2006 if Kroger was not levered is closest to:

  1. A) $1525 million
  2. B) $2035 million
  3. C) $1500 million
  4. D) $1325 million

Answer:  D

Explanation:  D)

Year

2006

2005

2004

Total Sales

60,553

56,434

53,791

Cost of goods sold

45,565

42,140

39,637

Selling, general & admin expenses

11,688

12,191

11,575

Depreciation

1265

1256

1209

Operating Income

2035

847

1370

Other Income

0

0

0

EBIT

2035

847

1370

Interest expense

510

557

604

Earnings before tax

1525

290

766

Taxes (35%)

534

102

268

Net Income

991

189

498

 

 

 

 

Tax Shield = .35 × Interest Exp

178.5

194.95

211.4

 

 

 

 

Total available to all investors Interest expense + net income

1501

746

1102

 

 

 

 

Total available to S.H. if  no leverage = EBIT(1 - 0.35)

1322.75

550.55

890.5

Diff: 2

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

 

8) The income that would be available to equity holders in 2005 if Kroger was not levered is closest to:

  1. A) $290 million
  2. B) $745 million
  3. C) $847 million
  4. D) $550 million

Answer:  D

Explanation:  D)

Year

2006

2005

2004

Total Sales

60,553

56,434

53,791

Cost of goods sold

45,565

42,140

39,637

Selling, general & admin expenses

11,688

12,191

11,575

Depreciation

1265

1256

1209

Operating Income

2035

847

1370

Other Income

0

0

0

EBIT

2035

847

1370

Interest expense

510

557

604

Earnings before tax

1525

290

766

Taxes (35%)

534

102

268

Net Income

991

189

498

 

 

 

 

Tax Shield = .35 × Interest Exp

178.5

194.95

211.4

 

 

 

 

Total available to all investors Interest expense + net income

1501

746

1102

 

 

 

 

Total available to S.H. if  no leverage = EBIT(1 - 0.35)

1322.75

550.55

890.5

Diff: 2

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

 


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 35%.

 

9) Rosewood's net income is closest to:

  1. A) $450 million
  2. B) $180 million
  3. C) $290 million
  4. D) $95 million

Answer:  B

Explanation:  B) Net income = (EBIT - Interest expense)(1 - τC)

= (450 - 175)(1 - .35) = $178.75

Diff: 1

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

10) The total of Rosewood's net income and interest payments is closest to:

  1. A) $270 million
  2. B) $355 million
  3. C) $290 million
  4. D) $450 million

Answer:  B

Explanation:  B) Net income + Interest expense = (EBIT - Interest expense)(1 - τC)

= (450 - 175)(1 - .35) = $178.75 + $175 = $353.73

Diff: 1

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

 

11) If Rosewood had no interest expense, its net income would be closest to:

  1. A) $405 million
  2. B) $160 million
  3. C) $450 million
  4. D) $290 million

Answer:  D

Explanation:  D) Net income = (EBIT - Interest expense)(1 - τC)

= (450 - 0)(1 - .35) = $292.50

Diff: 1

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

 

 

12) The amount of Rosewood's interest tax shield is closest to:

  1. A) $115 million
  2. B) $290 million
  3. C) $175 million
  4. D) $60 million

Answer:  D

Explanation:  D) Interest expense(τC) = 175(.35) = $61.25

Diff: 1

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

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 marginal corporate tax rate is 40%.

 

13) FBNA's EBIT is closest to:

  1. A) $43 million
  2. B) $40 Million
  3. C) $45 million
  4. D) $60 million

Answer:  A

Explanation:  A) EBIT = NI + Taxes + Interest expense

 

(EBIT - Interest Expense)(1 - .4) = NI

(EBIT - 3)(.6) = 24

 

EBIT = 24/.6 + 3 = $43

Diff: 2

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

 

14) IF FBNA increases leverage so that its interest expense rises by $1 million, then the amount its net income will change is closest to:

  1. A) -$400,000
  2. B) -$600,000
  3. C) $400,000
  4. D) $600,000

Answer:  B

Explanation:  B) (EBIT - Interest Expense - chg IE)(1 - .4) = NI + chg NI

(-1)(chg IE)(.6) = chg NI

-1,000,000(.6) = -600,000

 

Or, -$1 million(1 - .6) = -$600,000

Diff: 1

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

 

 

15) IF FBNA increases leverage so that its interest expense rises by $1 million, then the amount its unlevered EBIT will change is closest to:

  1. A) $0
  2. B) -$400,000
  3. C) $600,000
  4. D) $400,000

Answer:  A

Explanation:  A) EBIT does not change with a change in interest expense.

Diff: 1

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical


Use the table for the question(s) below.

 

Consider the following income statement for Kroger Inc. (all figures in $ Millions):

 

Year

2006

2005

2004

Total Sales

60,553

56,434

53,791

Cost of goods sold

45,565

42,140

39,637

Selling, general & admin expenses

11,688

12,191

11,575

Depreciation

1265

1256

1209

Operating Income

2035

847

1370

Other Income

0

0

0

EBIT

2035

847

1370

Interest expense

510

557

604

Earnings before tax

1525

290

766

Taxes (35%)

534

102

268

Net Income

991

189

498

 

16) 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.

Answer: 

Year

2006

2005

2004

Total Sales

60,553

56,434

53,791

Cost of goods sold

45,565

42,140

39,637

Selling, general & admin expenses

11,688

12,191

11,575

Depreciation

1265

1256

1209

Operating Income

2035

847

1370

Other Income

0

0

0

EBIT

2035

847

1370

Interest expense

510

557

604

Earnings before tax

1525

290

766

Taxes (35%)

534

102

268

Net Income

991

189

498

 

 

 

 

Tax Shield = .35 × Interest Exp

178.5

194.95

211.4

 

 

 

 

Total available to all investors Interest expense + net income

1501

746

1102

 

 

 

 

Total available to S.H. if no leverage = EBIT(1 - 0.35)

1322.75

550.55

890.5

Diff: 2

Section:  15.1 The Interest Tax Deduction

Skill:  Analytical

 

15.2   Valuing the Interest Tax Shield

 

1) Assume that investors hold Google stock in retirement accounts that are free from personal taxes. Also assume that Google's current pre-tax WACC is 14%. If Google were to issue sufficient debt at a pre-tax cost of 7% to give them a debt to value ratio of 0.5, then the Google's after-tax WACC would be closest to:

  1. A) 10.4%
  2. B) 12.8%
  3. C) 13.0%
  4. D) 15.0%
  5. E) 16.0%

Answer:  B

Explanation:  B) rWACC =  re +  rd -  rdTc = 14% - (7%)(35%) = 12.775%

Note that =  re +  rd is the pre-tax WACC.

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

Use the following information to answer the question(s) below.

 

Wyatt Oil issued $100 million in perpetual debt (at par) with an annual coupon of 7%. Wyatt will pay interest only on this debt. Wyatt's marginal tax rate is expected to be 40% for the foreseeable future.

 

2) Wyatt's annual interest tax shield is closest to:

  1. A) $2.8 million
  2. B) $4.2 million
  3. C) $7.0 million
  4. D) $40 million

Answer:  A

Explanation:  A) Annual interest tax shield = Debt × Interest × Tax rate = $100 million × 7% × 40% = $2.8 million

Diff: 1

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

 

3) The present value of Wyatt's annual interest tax shield is closest to:

  1. A) $4.2 million
  2. B) $7.0 million
  3. C) $40 million
  4. D) $60 million

Answer:  C

Explanation:  C) Annual interest tax shield = Debt × Interest × Tax rate = $100 million × 7% × 40% = $2.8 million

PV Tax shield =  =  = $40 million

Diff: 1

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

4) 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%. Wyatt's annual interest tax shield is now closest to:

  1. A) $2.8 million
  2. B) $4.2 million
  3. C) $40.0 million
  4. D) $60.0 million

Answer:  A

Explanation:  A) Annual interest tax shield = Debt × Interest × Tax rate = $100 million × 7% × 40% = $2.8 million

Note that although interest rates have dropped, the coupon payment on the debt issue has not.

Diff: 1

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

5) 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:

  1. A) $2.8 million
  2. B) $40.0 million
  3. C) $60.0 million
  4. D) $70.0 million

Answer:  D

Explanation:  D) Annual interest tax shield = Debt × Interest × Tax rate = $100 million × 7% × 40% = $2.8 million

PV Tax shield =  =  = $70 million

Diff: 1

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

 

6) 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:

  1. A) $0.8 million
  2. B) $1.2 million
  3. C) $20.0 million
  4. D) $30.0 million

Answer:  C

Explanation:  C) Annual interest expense = Amount × Interest × Tax rate = $50 million × 4% × 40% = $0.8 million

PV Tax shield =  =  = $20 million

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

7) 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 is in the 35% marginal tax bracket, the cost of permanently maintaining this $80 million reserve is closest to:

  1. A) $0.85 million
  2. B) $1.6 million
  3. C) $24.0 million
  4. D) $28.0 million

Answer:  D

Explanation:  D) Annual interest tax shield = Amount × Interest × Tax rate=$80 million × 3% × .35% = $0.84 million

PV Tax shield =  =  = $28 million

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

8) Taggart Transcontinental currently has no debt and an equity cost of capital of 16%. Suppose that Taggart decides to increase its leverage and maintain a market debt-to-value ratio of 1/3. Suppose Taggart's debt cost of capital is 9% and its corporate tax rate is 35%. Assuming that Taggart's pre-tax WACC remains constant, then with the addition of leverage its effective after-tax WACC will be closest to:

  1. A) 12.9%
  2. B) 13.0%
  3. C) 15.0%
  4. D) 16.0%

Answer:  C

Explanation:  C) rWACC =  re +  rd -  rdTe = 16% - (9%)(35%) = 14.95%

Note that =  re +  rd is the pre-tax WACC.

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

9) Rearden Metal currently has no debt and an equity cost of capital of 14%. Suppose that Rearden decides to increase its leverage and maintain a market debt-to-value ratio of 1/2. Suppose Rearden's debt cost of capital is 8% and its corporate tax rate is 40%. Assuming that Rearden's pre-tax WACC remains constant, then with the addition of leverage its effective after-tax WACC will be closest to:

  1. A) 10.8%
  2. B) 12.4%
  3. C) 12.8%
  4. D) 13.4%

Answer:  B

Explanation:  B) rWACC =  re +  rd -  rdTe = 14% - (8%)(40%) = 12.40%

Note that =  re +  rd is the pre-tax WACC.

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

10) Which of the following statements is FALSE?

  1. A) To determine the benefit of leverage for the value of the firm, we must compute the present value of the stream of future interest tax shields the firm will receive.
  2. B) Because the cash flows of the levered firm are equal to the sum of the cash flows from the unlevered firm plus the interest tax shield, by the Law of One Price the same must be true for the present values of these cash flows.
  3. C) By increasing the amount paid to debt holders through interest payments, the amount of the pre-tax cash flows that must be paid as taxes increases.
  4. D) When a firm uses debt, the interest tax shield provides a corporate tax benefit each year.

Answer:  C

Explanation:  C) By increasing the amount paid to debt holders through interest payments, the amount of the pre-tax cash flows that must be paid as taxes decreases.

Diff: 1

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Conceptual

 

11) Which of the following statements is FALSE?

  1. A) Given a forecast of future interest payments, we can determine the interest tax shield and compute its present value by discounting it at a rate that corresponds to its risk.
  2. B) The total value of the unlevered firm exceeds the value of the firm with leverage due to the present value of the tax savings from debt.
  3. C) To compute the increase in the firm's total value associated with the interest tax shield, we need to forecast a firm's debt and its interest payments.
  4. D) There is an important tax advantage to the use of debt financing.

Answer:  B

Explanation:  B) The total value of the levered firm exceeds the value of the firm without leverage due to the present value of the tax savings from debt.

Diff: 1

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Conceptual

 

12) Which of the following statements is FALSE?

  1. A) Given a 35% corporate tax rate, for every $1 in new permanent debt that the firm issues, the value of the firm increases by $0.65.
  2. B) The firm's marginal tax rate may fluctuate due to changes in the tax code and changes in the firm's income bracket.
  3. C) Many large firms have a policy of maintaining a certain amount of debt on their balance sheets.
  4. D) Typically, the level of future interest payments varies due to changes the firm makes in the amount of debt outstanding, changes in the interest rate on that debt, and the risk that the firm may default and fail to make an interest payment.

Answer:  A

Explanation:  A) Given a 35% corporate tax rate, for every $1 in new permanent debt that the firm issues, the value of the firm increases by $0.35.

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Conceptual

 

13) Which of the following statements is FALSE?

  1. A) The tax deductibility of interest lowers the effective cost of debt financing for the firm.
  2. B) When a firm uses debt financing, the cost of the interest it must pay is offset to some extent by the tax savings from the interest tax shield.
  3. C) With tax-deductible interest, the effective after-tax borrowing rate is r(τC).
  4. D) The WACC represents the cost of capital for the free cash flow generated by the firm's assets.

Answer:  C

Explanation:  C) With tax-deductible interest, the effective after-tax borrowing rate is r(1 - τC).

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Conceptual

 

14) Which of the following statements is FALSE?

  1. A) The higher the firm's leverage, the more the firm exploits the tax advantage of debt, and the lower its WACC.
  2. B) Corporate taxes lower the effective cost of debt financing, which translates into a reduction in the weighted average cost of capital.
  3. C) Because the firm's free cash flow is computed without considering the firm's leverage, we account for the benefit of the interest tax shield by calculating the WACC using the before tax cost of debt.
  4. D) The reduction in the WACC increases with the amount of debt financing.

Answer:  C

Explanation:  C) Because the firm's free cash flow is computed without considering the firm's leverage, we account for the benefit of the interest tax shield by calculating the WACC using the after tax cost of debt.

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Conceptual

 

15) Which of the following equations is INCORRECT?

  1. A) VL= VU+
  2. B) VL= VU+ τcD
  3. C) rwacc= rE+ rD - rDτc
  4. D) rwacc= rE+ rD(1 + τc)

Answer:  D

Explanation:  D) rwacc = rE + rD(1 - τc)

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Conceptual

 

16) Consider the following formula:

 

VL = VU +

The term  represents:

  1. A) the value of the firm with leverage.
  2. B) the present value of the interest tax shield.
  3. C) the preset value of the future interest payments.
  4. D) the interest tax shield each year.

Answer:  B

Diff: 1

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Conceptual

 

17) Consider the following formula:

 

VL = VU + τcD

 

The term τcD represents:

  1. A) the present value of the interest tax shield.
  2. B) the value of the firm with leverage.
  3. C) the preset value of the future interest payments.
  4. D) the interest tax shield each year.

Answer:  A

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Conceptual

 

18) Consider the following formula:

 

rwacc = rE + rD - rDτc

 

The term rDτc represents:

  1. A) the reduction due to the interest tax shield.
  2. B) the present value of the interest tax shield.
  3. C) the preset value of the future interest payments.
  4. D) the interest tax shield each year.

Answer:  A

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Conceptual

 

19) Consider the following formula:

 

rwacc = rE + rD - rDτc

 

The terms rE + rD represent:

  1. A) the after-tax WACC.
  2. B) the reduction due to equity financing.
  3. C) the before-tax WACC.
  4. D) the reduction due to the interest tax shield.

Answer:  C

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Conceptual

 


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.

 

20) If Flagstaff maintains a .5 debt to equity ratio, then Flagstaff's pre-tax WACC is closest to:

  1. A) 10.5%
  2. B) 11.0%
  3. C) 9.0%
  4. D) 10.0%

Answer:  B

Explanation:  B) rwacc = rE + rD

rwacc = .13 + .07 = .11

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

21) If Flagstaff currently maintains a .5 debt to equity ratio, then the value of Flagstaff as an all equity firm would be closest to:

  1. A) $80 million
  2. B) $100 million
  3. C) $73 million
  4. D) $115 million

Answer:  B

Explanation:  B) rwacc = rE + rD (Pre tax)

rwacc = .13 + .07 = .11

VU =  =  = $100 million

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

 

22) If Flagstaff currently maintains a .5 debt to equity ratio, then Flagstaff's after-tax WACC is closest to:

  1. A) 10.00%
  2. B) 10.25%
  3. C) 9.50%
  4. D) 8.75%

Answer:  B

Explanation:  B) rwacc = rE + rD (1 - τc)

rwacc = .13 + .07 (1 - .35) = .101833

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

23) If Flagstaff currently maintains a .5 debt to equity ratio, then the value of Flagstaff as a levered firm is closest to:

  1. A) $114 million
  2. B) $100 million
  3. C) $111 million
  4. D) $140 million

Answer:  C

Explanation:  C) rwacc = rE + rD (1 - τc)

rwacc = .13 + .07 (1 - .35) = .101833

VL =  =  = $111.37 million

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

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

  1. A) $11 million
  2. B) $18 million
  3. C) $10 million
  4. D) $24 million

Answer:  A

Explanation:  A) rwacc =  rE +  rD (Pre tax)

rwacc =  .13 +  .07 = .11

VU =  =  = $100 million

rwacc =  rE +  rD (1 - τc) (after tax)

rwacc =  .13 +  .07 (1 - .35) = .101833

VL =  =  = $111.37 million

PV of tax shield = VL - VU = $111.37 - $100 = $11.37

Diff: 3

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

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

  1. A) 11.0%
  2. B) 10.5%
  3. C) 10.0%
  4. D) 9.0%

Answer:  C

Explanation:  C) rwacc =  rE +  rD

rwacc =  .13 +  .07 = .10

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

26) If Flagstaff currently maintains a debt to equity ratio of 1, then the value of Flagstaff as an all equity firm would be closest to:

  1. A) $73 million
  2. B) $80 million
  3. C) $115 million
  4. D) $100 million

Answer:  C

Explanation:  C) rwacc =  rE +  rD (Pre tax)

rwacc =  .13 +  .07 = .10

VU =  =  = $114.29 million

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

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

  1. A) 10.25%
  2. B) 10.00%
  3. C) 9.50%
  4. D) 8.75%

Answer:  D

Explanation:  D) rwacc =  rE +  rD (1 - τc)

rwacc =  .13 +  .07 (1 - .35) = .087750

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

28) If Flagstaff currently maintains a debt to equity ratio of 1, then the value of Flagstaff as a levered firm is closest to:

  1. A) $114 million
  2. B) $100 million
  3. C) $111 million
  4. D) $140 million

Answer:  D

Explanation:  D) rwacc =  rE +  rD (1 - τc)

rwacc =  .13 +  .07 (1 - .35) = .087750

VL =  =  = $138.53 million

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

29) If Flagstaff currently maintains a debt to equity ratio of 1, then the value of Flagstaff's interest tax shield is closest to:

  1. A) $10 million
  2. B) $18 million
  3. C) $11 million
  4. D) $24 million

Answer:  D

Explanation:  D) rwacc =  rE +  rD (Pre tax)

rwacc =  .13 +  .07 = .10

VU =  =  = $114.29 million

rwacc =  rE +  rD (1 - τc)

rwacc =  .13 +  .07 (1 - .35) = .087750

VL =  =  = $138.53 million

PV of tax shield = VL - VU = $138.53 - $114.29 = $24.24

Diff: 3

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

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' marginal tax rate is 35% and the firm pays a rate of 8% interest on its debt.

 

30) LCMS' annual interest tax shield is closest to:

  1. A) $2.8 million
  2. B) $2.0 million
  3. C) $3.6 million
  4. D) $5.6 million

Answer:  B

Explanation:  B) annual Tax shield = debt × τC = $70M × .35 × .08 = 1.96M

Diff: 1

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

 

31) The present value of LCMS' interest tax shield is closest to:

  1. A) $45.5 million
  2. B) $20.0 million
  3. C) $24.5 million
  4. D) $35.0 million

Answer:  C

Explanation:  C) PV of Tax shield = debt × τC = $70M × .35 = 24.5M

Diff: 1

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

32) Assuming that the risk of the tax shield is only 6% even though the debt pays 8%, then the present value of LCMS' interest tax shield is closest to:

  1. A) $24.5 million
  2. B) $18 million
  3. C) $33.0 million
  4. D) $20.0 million

Answer:  C

Explanation:  C) PV of Tax shield = debt × τC × rD/RD2 = $70M × .35 × .08/.06 = 32.67

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

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.

 

33) If Flagstaff currently maintains a .8 debt to equity ratio, then calculate the value of Flagstaff's interest tax shield.

Answer:  rwacc =  rE +  rD (Pre tax)

rwacc =  .13 +  .07 = .103333

VU =  =  = $109.09 million

rwacc =  rE +  rD (1 - τc) (after tax)

rwacc =  .13 +  .07(1 - .35) = .092444

VL =  =  = $128.11 million

PV of tax shield = VL - VU = $128.11 - $109.09 = $19.02

Diff: 3

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

34) Your firm currently has $250 million in debt outstanding with an 8% interest rate.  The terms of the loan require the firm to repay $50 million of the balance each year.  Suppose that the marginal corporate tax rate is 35% and that the interest tax shields have the same risk as the loan.  What is the present value of the interest tax shields from this debt?

Answer: 

Year

Beginning Balance

Interest Expense

 EndingBalance

 Tax Shield

PV of Tax Shield

1

250

20

200

7

6.4815

2

200

16

150

5.6

4.8011

3

150

12

100

4.2

3.3341

4

100

8

50

2.8

2.0581

5

50

4

0

1.4

0.9528

 

 

 

 

Total =

17.6276

 

Interest expense = beginning balance × .08

Tax shield = interest expense × .35

PV of tax shield = tax shield/(1.08)n

Diff: 3

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

35) 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?

Answer:  Use the formula rwacc =  rE +  rD -  rDτc

The last term rDτc captures the amount that the WACC is lowered because of the interest tax shield.

 

So,  rDτc =  .08(.40) = .012 or 1.2%

Diff: 2

Section:  15.2 Valuing the Interest Tax Shield

Skill:  Analytical

 

15.3   Recapitalizing to Capture the Tax Shield

 

1) Wyatt Oil has 25 million shares outstanding and has a marginal corporate tax rate of 40%. Wyatt Oil announces that it will payout $40 million in cash to investors through a special dividend. Shareholders had previously assumed that Wyatt Oil would retain this excess cash permanently. The amount that Wyatt Oil's share price can be expected to change upon this announcement is closest to:

  1. A) $0.56
  2. B) $0.64
  3. C) $0.96
  4. D) $1.56

Answer:  B

Explanation:  B) PV Tax shield =  =  

       = $16 million per share =  = $0.64

Diff: 2

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Analytical

 

2) Galt Industries has 125 million shares outstanding and has a marginal corporate tax rate of 35%. Galt announces that it will use $75 million in excess cash to repurchase shares. Shareholders had previously assumed that Galt would retain this excess cash permanently. The amount Galt's share price can be expected to change upon this announcement is closest to:

  1. A) $0.21
  2. B) $0.24
  3. C) $0.36
  4. D) $0.39

Answer:  A

Explanation:  A) PV Tax shield =  =  

        = $20.25 million per share =  = $0.21

Diff: 2

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Analytical

 

3) Which of the following statements is FALSE?

  1. A) Once investors know the recap will occur, the share price will rise immediately to a level that reflects the value of the interest tax shield that the firm will receive from its recapitalization.
  2. B) When securities are fairly priced, the original shareholders of a firm capture the full benefit of the interest tax shield from an increase in leverage.
  3. C) In the presence of corporate taxes, we do not include the interest tax shield as one of the firm's assets on its market value balance sheet.
  4. D) We can analyze the recapitalization using the market value balance sheet; it states that the total market value of a firm's securities must equal the total market value of the firm's assets.

Answer:  C

Explanation:  C) In the presence of corporate taxes, we include the interest tax shield as one of the firm's assets on its market value balance sheet.

Diff: 1

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Conceptual

 

4) Which of the following statements regarding recapitalizations is FALSE?

  1. A) With a recapitalization, even though leverage reduces the total value of equity, shareholders capture the benefits of the interest tax shield up front.
  2. B) The share price always rises after the completion of the recapitalization.
  3. C) Leveraged recaps were especially popular in the mid- to late-1980s, when many firms found that these transactions could reduce their tax payments.
  4. D) When a firm makes a significant change to its capital structure, the transaction is called a recapitalization.

Answer:  B

Explanation:  B) This is only always true if we ignore the other potential side effects of leverage, such as the costs of financial distress.

Diff: 1

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Conceptual

 

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.

 

5) The value of KD's unlevered equity is closest to:

  1. A) $600 million
  2. B) $470 million
  3. C) $390 million
  4. D) $400 million

Answer:  A

Explanation:  A) VU = (30 million shares) × $20 per share = $600 million

Diff: 1

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Analytical

6) The preset value of KD's interest tax shield is closest to:

  1. A) $130 million
  2. B) $200 million
  3. C) $400 million
  4. D) $70 million

Answer:  D

Explanation:  D) Tax Shield = Debt × τC = $200 million × .35 = $70 million

Diff: 1

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Analytical

 

7) After the recapitalization, the total value of KD as a levered firm is closest to:

  1. A) $470 million
  2. B) $730 million
  3. C) $670 million
  4. D) $530 million

Answer:  C

Explanation:  C) VU = (30 million shares) × $20 per share = $600 million

Tax Shield = Debt × τC = $200 million × .35 = $70 million

VL = VU + Interest Tax shield = 600M + 70M = 670M

Diff: 2

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Analytical

 

8) After the recapitalization, the value of KD's levered equity is closest to:

  1. A) $670 million
  2. B) $400 million
  3. C) $330 million
  4. D) $470 million

Answer:  D

Explanation:  D) VU = (30 million shares) × $20 per share = $600 million

Tax Shield = Debt × τC = $200 million × .35 = $70 million

VL = VU + Interest Tax shield = 600M + 70M = 670M -200M debt = $470 M

Diff: 2

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Analytical

 

 

9) i) If KD can repurchase its existing shares at $20 per share, what will the new share price be after the transaction? 

  1. A) $22.35
  2. B) $22.00
  3. C) $22.65
  4. D) $23.50

Answer:  D

Explanation:  D) VU = (30 million shares) × $20 per share = $600 million

Tax Shield = Debt × τC = $200 million × .35 = $70 million

VL = VU + Interest Tax shield = 600M + 70M = 670M

Equity = VL ‒ Debt = 670M ‒ 200M = 470M

Share Price = Equity/Shares = 470M/20 = $23.50

Diff: 2

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Analytical

  1. ii) In reality, we should expect the share price to increase on announcement of the transaction, before the shares are repurchased. What will the new share price be after the announcement?
  2. A) $22.33
  3. B) $22.65
  4. C) $22.00
  5. D) $23.50

Answer: A

Explanation: Upon announcement and before the recap, VL = 670 = Equity Value, so share price = 670/30 = $22.33

Diff: 2

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Analytical

iii) How many shares will KD repurchase in the recapitalization?

  1. A) 12.54 million shares
  2. B) 8.96 million shares
  3. C) 3.65 million shares
  4. D) 9.45 million shares

Answer: B

Explanation: Shares Repurchased = 200/22.33 = 8.96 million shares

After the transaction, Equity value = 670 - 200 = 470, so share price is 470/(30-8.96) = $22.33, as before.

Diff: 2

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Analytical

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 35%, 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.

 

10) The value of Shepard Industries without leverage is closest to:

  1. A) $114 million
  2. B) $50 million
  3. C) $100 million
  4. D) $64 million

Answer:  C

Explanation:  C) VU = FCF/rE = 10/.10 = $100M

Diff: 1

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Analytical

 

11) The value of Shepard Industries with leverage is closest to:

  1. A) $64 million
  2. B) $100 million
  3. C) $135 million
  4. D) $114 million

Answer:  D

Explanation:  D) VU = FCF/rE = 10/.10 = $100M

PV of Tax shield = $40 × .35 = 14

VL = VU + PV of tax shield = 100 + 14 = 114

Diff: 1

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Analytical

 

 

12) 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 35% 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.

Answer:  VU = (50 million shares) × $25 per share = $1250 million

Tax Shield = Debt × τc = $500 million × .35 = $175 million

VL = VU + Interest Tax shield = 1250M + 175M = 1425M/50M shares = 28.50

Diff: 2

Section:  15.3 Recapitalizing to Capture the Tax Shield

Skill:  Analytical

15.4   Personal Taxes

 

1) 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:

  1. A) 10%
  2. B) 15%
  3. C) 25%
  4. D) 28%

Answer:  C

Explanation:  C) t* = 1 -  = 1 -  = 25%

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Analytical

 

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%.

 

2)  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 amount that Google needs to borrow is closest to:

  1. A) $14.25 billion
  2. B) $22.00 billion
  3. C) $24.50 billion
  4. D) $40.75 billion

Answer:  D

Explanation:  D) Interest tax shield = Amount × Interest × Tax rate = $X billion × 7% × .35% = $1 billion

       → amount needed to borrow = X = $40.8163 billion

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Analytical

 

3) 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:

  1. A) $14.25 billion
  2. B) $22.00 billion
  3. C) $24.50 billion
  4. D) $40.75 billion

Answer:  A

Explanation:  A) Interest tax shield = Amount × Interest × Tax rate = $X billion × 7% × .35% = $1 billion

              → amount needed to borrow = X = $40.8163 billion

PV Tax shield =  =  = $14.2857 billion

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Analytical

 

4) 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 taxes by $1 billion per year permanently, then the effective tax advantage of this debt would be closest to:

  1. A) 10%
  2. B) 15%
  3. C) 25%
  4. D) 30%

Answer:  B

Explanation:  B) t* = 1 -  = 1 -  = 15%

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Analytical

 

5) 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:

  1. A) $6.1 billion
  2. B) $10.2 billion
  3. C) $12.2 billion
  4. D) $14.3 billion

Answer:  A

Explanation:  A) t* = 1 -  = 1 -  = 15%

Interest tax shield = Amount × Interest × Tax rate = $X billion × 7% × .35% = $1 billion

              → amount needed to borrow = X = $40.8163 billion

PV Tax shield =  =  = $6.12 billion

Diff: 3

Section:  15.4 Personal Taxes

Skill:  Analytical

6) 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 $600 million per year permanently, then the amount that Google needs to borrow is closest to:

  1. A) $14.25 billion
  2. B) $22.00 billion
  3. C) $24.50 billion
  4. D) $40.75 billion

Answer:  C

Explanation:  C) Interest tax shield = Amount × Interest × Tax rate = $X billion × 7% × .35% = $.6 billion

       → amount needed to borrow = X = $24.4897 billion

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Analytical

 

7) 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 $600 million per year permanently, then the value that would be created is closest to:

  1. A) $6.4 billion
  2. B) $8.6 billion
  3. C) $9.8 billion
  4. D) $14.3 billion

Answer:  B

Explanation:  B) Interest tax shield = Amount × Interest × Tax rate = $X billion × 7% × .35% = $.6 billion

              → amount needed to borrow = X = $24.4897 billion

PV Tax shield =  =  = $8.57 billion

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Analytical

 

8) 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:

  1. A) 10%
  2. B) 15%
  3. C) 25%
  4. D) 30%

Answer:  C

Explanation:  C) t* = 1 -  = 1 -  = 26.333%

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Analytical

 

9) 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:

  1. A) $6.4 billion
  2. B) $8.6 billion
  3. C) $9.8 billion
  4. D) $14.3 billion

Answer:  A

Explanation:  A) t* = 1 -  = 1 -  = 26.333%

Interest tax shield = Amount × Interest × Tax rate = $X billion × 7% × .35% = $.6 billion

       → amount needed to borrow = X - $24.4897 billion

PV Tax shield =  =  = $6.44 billion

Diff: 3

Section:  15.4 Personal Taxes

Skill:  Analytical

 

10) Which of the following statements is FALSE?

  1. A) The value of a firm is equal to the amount of money the firm can raise by issuing securities.
  2. B) By reducing a firm's corporate tax liability, debt allows the firm to pay more of its cash flows to investors.
  3. C) Equity investors must pay taxes on dividends but not capital gains.
  4. D) For individuals, interest payments received from debt are taxed as income.

Answer:  C

Explanation:  C) Equity investors must pay taxes on dividends and capital gains.

Diff: 1

Section:  15.4 Personal Taxes

Skill:  Conceptual

 

11) Which of the following statements is FALSE?

  1. A) Personal taxes have the potential to offset some of the corporate tax benefits of leverage.
  2. B) The actual interest tax shield depends on the reduction in the total taxes (both corporate and personal) that are paid.
  3. C) The amount of money an investor will pay for a security ultimately depends on the benefits the investor will receive—namely, the cash flows the investor will receive before all taxes have been paid.
  4. D) Just like corporate taxes, personal taxes reduce the cash flows to investors and diminish firm value.

Answer:  C

Explanation:  C) The amount of money an investor will pay for a security ultimately depends on the benefits the investor will receive—namely, the cash flows the investor will receive after all taxes have been paid.

Diff: 1

Section:  15.4 Personal Taxes

Skill:  Conceptual

 

12) Which of the following statements is FALSE?

  1. A) To determine the true tax benefit of leverage, we need to evaluate the combined effect of both corporate and personal taxes.
  2. B) A personal tax disadvantage for debt causes the WACC to decline more slowly with leverage than it otherwise would.
  3. C) Personal taxes have an indirect effect on the firm's weighted average cost of capital.
  4. D) In the United States and many other countries, capital gains from equity have historically been taxed more heavily than interest income.

Answer:  D

Explanation:  D) In the United States and many other countries, capital gains from equity have historically been taxed at a lower rate than interest income.

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Conceptual

 

13) Which of the following statements is FALSE?

  1. A) Unlike taxes on capital gains or interest income, which are paid annually, taxes on dividends are paid only at the time the investor sells the stock.
  2. B) Deferring the payment of capital gains taxes lowers the present value of the taxes, which can be interpreted as a lower effective capital gains tax rate.
  3. C) Investors with longer holding periods or with accrued losses face a lower tax rate on equity income, decreasing the effective tax advantage of debt.
  4. D) Investors with accrued losses that they can use to offset gains face a zero effective capital gains tax rate.

Answer:  A

Explanation:  A) Unlike taxes on dividends or interest income, which are paid annually, taxes on capital gains are paid only at the time the investor sells the stock.

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Conceptual

 

14) Consider the following formula:

 

τ* =

 

The term τ* is:

  1. A) the effective tax advantage of debt.
  2. B) the effective personal tax rate on interest income.
  3. C) the effective personal tax rate on equity.
  4. D) the effective corporate tax rate on income.

Answer:  A

Diff: 1

Section:  15.4 Personal Taxes

Skill:  Conceptual

 

15) Consider the following formula:

 

τ* =

The term τe is:

  1. A) the effective personal tax rate on equity.
  2. B) the effective tax advantage of debt.
  3. C) the effective corporate tax rate on income.
  4. D) the effective personal tax rate on interest income.

Answer:  A

Diff: 1

Section:  15.4 Personal Taxes

Skill:  Conceptual

 

16) Consider the following formula:

 

τ* =

The term τi is:

  1. A) the effective personal tax rate on interest income.
  2. B) the effective personal tax rate on equity.
  3. C) the effective corporate tax rate on income.
  4. D) the effective tax advantage of debt.

Answer:  A

Diff: 1

Section:  15.4 Personal Taxes

Skill:  Conceptual


Use the table for the question(s) below.

 

Consider the following top federal tax rates in the United States:

 

                                Personal Tax Rates

Year

Corporate Tax Rate

Interest Income

Dividends

Capital Gains

2000

35%

40%

40%

20%

2005

35%

35%

15%

15%

 

17) In 2000, the effective tax rate for debt holders was closest to:

  1. A) 61%
  2. B) 52%
  3. C) 64%
  4. D) 40%

Answer:  D

Explanation:  D) Since there is no corporate tax on interest payments, the interest rate is simply the personal rate on interest income which is 40%.

Diff: 1

Section:  15.4 Personal Taxes

Skill:  Analytical

 

18) In 2000, assuming an average dividend payout ratio of 50%, the effective tax rate for equity holders was closest to:

  1. A) 69%
  2. B) 65%
  3. C) 55%
  4. D) 30%

Answer:  C

Explanation:  C) The average personal tax rate on equity is (40% + 20%)/2 = 30%

So, the effective tax rate = 1 - (1 - τc)(1 - τe) = 1 - (1 - .35)(1 - .30) = .545

Diff: 1

Section:  15.4 Personal Taxes

Skill:  Analytical

 

19) In 2000, assuming an average dividend payout ratio of 50%, the effective tax advantage for debt (t*) was closest to:

  1. A) 40%
  2. B) 24%
  3. C) 30%
  4. D) 18%

Answer:  B

Explanation:  B) The average personal tax rate on equity is (40% + 20%)/2 = 30%

τ* =  =  = 0.241667

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Analytical

20) In 2005, the effective tax rate for debt holders was closest to:

  1. A) 58%
  2. B) 35%
  3. C) 40%
  4. D) 65%

Answer:  B

Explanation:  B) Since there is no corporate tax on interest payments the interest rate is simply the personal rate on interest income which is 35%.

Diff: 1

Section:  15.4 Personal Taxes

Skill:  Analytical

 

21) In 2005, assuming an average dividend payout ratio of 50%, the effective tax rate for equity holders was closest to:

  1. A) 30%
  2. B) 55%
  3. C) 45%
  4. D) 50%

Answer:  C

Explanation:  C) The average personal tax rate on equity is (15% + 15%)/2 = 15%

So, the effective tax rate = 1 - (1 - τc)(1 - τe) = 1 - (1 - .35)(1 - .15) = .4475

Diff: 1

Section:  15.4 Personal Taxes

Skill:  Analytical

 

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

  1. A) 24%
  2. B) 18%
  3. C) 35%
  4. D) 15%

Answer:  D

Explanation:  D) The average personal tax rate on equity is (15% + 15%)/2 = 15%

τ* =  =  = 0.15

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Analytical

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.

 

 

23) Assume the following tax schedule:

 

                              Personal Tax Rates

Year

Corporate Tax Rate

Interest Income

Dividends

Capital Gains

2000

35%

40%

40%

20%

2005

35%

35%

15%

15%

 

Considering the effect of personal taxes, calculate the PV of the interest tax shield provided by KD's recapitalization in 2005.

Answer:  The average personal tax rate on equity is (15% + 15%)/2 = 15%

 

τ* =  =  = 0.15

Tax Shield = Debt × τ* = $200 million × .15 = $30 million

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Analytical

 

24) The Grant Corporation is considering permanently adding $500 million of debt to its capital structure.  Grant's corporate tax rate is 35% and investors pay a tax rate of 40% on their interest income and 20% on their income from capital gains and dividends.  Calculate the present value of the interest tax shield provided by this new debt.

Answer:  τ* =  =  = 0.1333333

Tax Shield = Debt × τ* = $500 million × .1333333 = $66.67 million

Diff: 2

Section:  15.4 Personal Taxes

Skill:  Analytical

 

15.5   Optimal Capital Structure with Taxes

 

1) Which of the following statements is FALSE?

  1. A) Even after adjusting for personal taxes, the value of an unlevered firm exceeds the value of a levered firm, and there is a tax advantage to using debt financing.
  2. B) In Modigliani and Miller's setting of perfect capital markets, firms could use any combination of debt and equity to finance their investments without changing the value of the firm.
  3. C) When firms raise new capital from investors, they do so primarily by issuing debt.
  4. D) In most years aggregate equity issues are negative, meaning that firms are reducing the amount of equity outstanding by buying shares.

Answer:  A

Explanation:  A) Even after adjusting for personal taxes, the value of an levered firm exceeds the value of a unlevered firm, and there is a tax advantage to using debt financing.

Diff: 1

Section:  15.5 Optimal Capital Structure with Taxes

Skill:  Conceptual

 

2) Which of the following statements is FALSE?

  1. A) The data show a clear preference for equity as a source of external financing for the total population of U.S. firms.
  2. B) Debt as a fraction of firm value has varied in a range from 30-45% for the average firm.
  3. C) Capital expenditures greatly exceed firms' external financing, implying that most investment and growth is supported by internally generated funds, such as retained earnings.
  4. D) Firms in growth industries like biotechnology or high technology carry very little debt, whereas airlines, auto makers, utilities, and financial firms have high leverage ratios.

Answer:  A

Explanation:  A) The data show a clear preference for debt as a source of external financing for the total population of U.S. firms.

Diff: 2

Section:  15.5 Optimal Capital Structure with Taxes

Skill:  Conceptual

 

3) Which of the following statements is FALSE?

  1. A) Even though firms have not issued new equity, the market value of equity has risen over time as firms have grown.
  2. B) While firms seem to prefer debt when raising external funds, not all investment is externally funded.
  3. C) To receive the full tax benefits of leverage a firm needs to use 100% debt financing.
  4. D) If bankruptcy is costly, these costs might offset the tax advantages of debt financing.

Answer:  C

Explanation:  C) To receive the full tax benefits of leverage a firm needs to be paying taxes.

Diff: 2

Section:  15.5 Optimal Capital Structure with Taxes

Skill:  Conceptual

 

4) Which of the following statements is FALSE?

  1. A) Aside from taxes, another important difference between debt and equity financing is that debt payments must be made to avoid bankruptcy, whereas firms have no similar obligation to pay dividends or realize capital gains.
  2. B) Increasing the level of debt increases the probability of bankruptcy.
  3. C) A firm receives a tax benefit only if it is paying taxes in the first place.
  4. D) To the extent that a firm has other tax shields, its taxable earnings will be increased and it will rely more heavily on the interest tax shield.

Answer:  D

Explanation:  D) To the extent that a firm has other tax shields, its taxable earnings will be decreased and it will rely less heavily on the interest tax shield.

Diff: 2

Section:  15.5 Optimal Capital Structure with Taxes

Skill:  Conceptual

 

5) Which of the following statements is FALSE?

  1. A) A biotech firm might be developing drugs with tremendous potential, but it has yet to receive any revenue from these drugs. Such a firm will not have taxable earnings. In that case, a tax-optimal capital structure does not include debt.
  2. B) No corporate tax benefit arises from incurring interest payments that regularly exceed EBIT.
  3. C) The optimal level of leverage from a tax saving perspective is the level such that interest equals EBIT.
  4. D) In general, as a firm's interest expense approaches its expected taxable earnings, the marginal tax advantage of debt increases, limiting the amount of equity the firm should use.

Answer:  D

Explanation:  D) In general, as a firm's interest expense approaches its expected taxable earnings, the marginal tax advantage of debt decreases, limiting the amount of equity the firm should use.

Diff: 3

Section:  15.5 Optimal Capital Structure with Taxes

Skill:  Conceptual

 

6) Which of the following statements is FALSE?

  1. A) If there is uncertainty regarding EBIT, then with a higher interest expense there is a greater risk that interest will exceed EBIT.
  2. B) Even for a firm with positive earnings, growth will affect the optimal leverage ratio.
  3. C) From a tax perspective, the firm's optimal level of debt is proportional to its current earnings.
  4. D) The optimal proportion of debt in the firm's capital structure will be higher, the higher the firm's growth rate.

Answer:  D

Explanation:  D) The optimal proportion of debt in the firm's capital structure will be higher, the lower the firm's growth rate.

Diff: 2

Section:  15.5 Optimal Capital Structure with Taxes

Skill:  Conceptual

 

7) 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?

Answer:  Divide FCF by the interest rate to calculate the amount of debt that could be issued:

4,000,000/.08 = $50,000,000 in new debt

Diff: 2

Section:  15.5 Optimal Capital Structure with Taxes

Skill:  Analytical

 

8) KAHR Incorporated will have EBIT this coming year of $45 million.  It will also spend $18 million on total capital expenditures, increases its net working capital by $7, and have $9 million in depreciation expenses.  KAHR is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%.  If the interest rate on new KAHR debt is 8%, how much should KAHR borrow today if they want to maximize there interest tax shield?

Answer:  Amount to issue = EBIT/rD = 45/.08 = 562.5 million

Diff: 1

Section:  15.5 Optimal Capital Structure with Taxes

Skill:  Analytical

 

 

 

 

 

 

 

 

 

 -----

Key Contents: Financial Management and Corporate Finance
------
Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business, University of Western Ontario
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown
International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick, Columbia University
------
Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University, Jarrad Harford, University of Washington

-----

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, Virginia Polytechnic Instit. and State University
Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
------
Part 1: Fundamental Concepts and Basic Tools of Finance
1. Financial Management
2. Financial Statements
3. The Time Value of Money (Part 1)
4. The Time Value of Money (Part 2)
5. Interest Rates
Part 2: Valuing Stocks and Bonds and Understanding Risk and Return
6. Financial Management Bonds and Bond Valuation
7. Stocks and Stock Valuation
8. Risk and Return
Part 3: Capital Budgeting
9: Capital Budgeting Decision Models
10: Cash Flow Estimation
11: The Cost of Capital
Part 4: Financial Planning and Evaluating Performance
12. Forecasting and Short-Term Financial Planning
13. Working Capital Management
14. Financial Ratios and Firm Performance
Part 5: Other Selected Finance Topics
15. Raising Capital
16. Capital Structure
17. Dividends, Dividend Policy, and Stock Splits
18. International Financial Management
Appendix 1 Future Value Interest Factors
Appendix 2 Present Value Interest Factors
Appendix 3 Future Value Interest Factors of an Annuity
Appendix 4 Present Value Interest Factors of an Annuity
Appendix 5 Answers to Prepping for Exam Questions
------
1. Overview of Financial Management
2. Sizing Up a Business: A Non-Financial Perspective
3. Understanding Financial Statements
4. Measuring Financial Performance
5. Managing Day-To-Day Cash Flow
6. Projecting Financial Requirements and Managing Growth
7. Time Value of Money Basics and Applications
8. Making Investment Decisions
9. Overview of Capital Markets: Long-Term Financing Instruments
10. Assessing the Cost of Capital: What Investors Require
11. Understanding Financing and Payout Decisions
12. Designing an Optimal Capital Structure
13. Measuring and Creating Value
14. Comprehensive Case Study: Wal-Mart Stores, Inc.

1. Overview of Financial Management
• 1.1: Financial Management and the Cash Flow Cycle
• 1.2: The Role of Financial Managers
• 1.3: A Non-Financial Perspective of Financial Management
• 1.4: Financial Management’s Relationship with Accounting and Other Disciplines
• 1.5: Types of Firms
• 1.6: A Financial Management Framework
• 1.7: Relevance for Managers
• 1.8: Summary
• 1.9: Additional Readings
• 1.10: End of Chapter Problems
2. Sizing Up a Business: A Non-Financial Perspective
• 2.1: Sizing Up The Overall Economy
o 2.1.1: GDP Components
o 2.1.2: Sector-Related Fluctuations
o 2.1.3: Inflation and Interest Rates
o 2.1.4: Capital Markets
o 2.1.5: Economic Size-Up Checklist
• 2.2: Sizing Up the Industry
o 2.2.1: Industry Life Cycles
o 2.2.2: The Competitive Environment
o 2.2.3: Opportunities and Risks
o 2.2.4: Industry Size-up Checklist
• 2.3: Sizing Up Operations Management and Supply Risk
• 2.4: Sizing Up Marketing Management and Demand Risk
• 2.5: Sizing Up Human Resource Management and Strategy
• 2.6: Sizing Up Home Depot: An Example
• 2.7: Relevance for Managers
• 2.8 Summary
• 2.9: Additional Readings and Information
• 2.10: End of Chapter Problems
3. Understanding Financial Statements
• 3.1: Understanding Balance Sheets
o 3.1.1: Understanding Assets
o 3.1.2: Understanding Liabilities
o 3.1.3: Understanding Equity
• 3.2: Understanding Income Statements
o 3.2.1: Understanding Revenues, Costs, Expenses, and Profits
o 3.2.2: Connecting a Firm’s Income Statement and Balance Sheet
• 3.3: Understanding Cash Flow Statements
o 3.3.1: Cash Flows Related to Operating Activities
o 3.3.2: Cash Flows from Investing Activities
o 3.3.3: Cash Flows from Financing Activities
• 3.4: Relevance for Managers
• 3.5: Summary
• 3.6: Additional Readings and Sources of Information
• 3.7: End of Chapter Problems
4. Measuring Financial Performance
• 4.1: Performance Measures
o 4.1.1: Return on Equity
o 4.1.2: Profitability Measures
o 4.1.3: Resource Management Measures
o 4.1.4: Liquidity Measures
o 4.1.5: Leverage Measures
o 4.1.6: Application: Home Depot
• 4.2: Reading Annual Reports
• 4.3: Relevance for Managers
• 4.4: Summary
• 4.5: Additional Readings and Sources of Information
• 4.6: End of Chapter Problems
5. Managing Day-To-Day Cash Flow
• 5.1: Cash Flow Cycles
• 5.2: Working Capital Management
o 5.2.1: Managing Inventory
o 5.2.2: Managing Accounts Receivable
o 5.2.3: Managing Accounts Payable
o 5.2.4: Application: Home Depot
• 5.2.4.1: Orange Computers and Little Orange Computers
• 5.2.4.2: Home Depot
• 5.3: Short-Term Financing
o 5.3.1: Bank Loans
o 5.3.2: Commercial Paper
o 5.3.3: Banker’s Acceptance
• 5.4: Relevance for Managers
• 5.5: Summary
• 5.6: Additional Readings
• 5.7: End of Chapter Problems

6. Projecting Financial Requirements and Managing Growth
• 6.1: Generating Pro Forma Income Statements
o 6.1.1: Establishing the Cost of Goods Sold and Gross Profit
o 6.1.2: Establishing Expenses
o 6.1.3: Establishing Earnings
• 6.2: Generating Pro Forma Balance Sheets
o 6.2.1: Establishing Assets
o 6.2.2: Establishing Liabilities and Equity
• 6.3: Generating Pro Forma Cash Budgets
o 6.3.1: Establishing Cash Inflows
o 6.3.2: Establishing Cash Outflows
o 6.3.3: Establishing Net Cash Flows
• 6.4: Performing Sensitivity Analysis
o 6.4.1: Sales Sensitivity
o 6.4.1: Interest Rate Sensitivity
o 6.4.3: Working Capital Sensitivity
• 6.5: Understanding Sustainable Growth and Managing Growth
• 6.6: Relevance for Managers
• 6.7: Summary
• 6.8: Additional Readings and Resources
• 6.9: Problems

7. Time Value of Money Basics and Applications
• 7.1: Exploring Time Value of Money Concepts
o 7.1.1: Future Values
o 7.1.2: Present Values
o 7.1.3: Annuities
o 7.1.4: Perpetuities
• 7.2: Applying Time Value of Money Concepts to Financial Securities
o 7.2.1: Bonds
o 7.2.2: Preferred Shares
o 7.2.3: Common Equity
• 7.3: Relevance for Managers
• 7.4: Summary
• 7.5: Additional Readings
• 7.6: End of Chapter Problems

8. Making Investment Decisions
• 8.1: Understanding the Decision-Making Process
• 8.2: Capital Budgeting Techniques
o 8.2.1: Payback
• 8.2.1.1: Strengths and Weaknesses of the Payback Method
o 8.2.2: Net Present Value
• 8.2.2.1: Strengths and Weaknesses of the Net Present Value Method
o 8.2.3: Internal Rate of Return
• 8.2.3.1: Strengths and Weaknesses of the Internal Rate of Return Method
• 8.2.3.2: Modified Internal Rate of Return
• 8.3: Capital Budgeting Extensions
o 8.3.1: Profitability Index
o 8.3.2: Equivalent Annual Cost and Project Lengths
o 8.3.3: Mutually Exclusive Projects and Capital Rationing
• 8.4: Relevance for Managers
• 8.5: Summary
• 8.6: Additional Readings
• 8.7: End of Chapter Problems

9. Overview of Capital Markets: Long-Term Financing Instruments
• 9.1: Bonds
o 9.1.1: Changing Bond Yields
o 9.1.2: Bond Features
o 9.1.3: Bond Ratings
• 9.2: Preferred Shares
• 9.3: Common Shares
o 9.3.1: Historical Returns
• 9.4: Capital Markets Overview
o 9.4.1: Private versus Public Markets
o 9.4.2: Venture Capital and Private Equity
o 9.4.3: Initial Offerings versus Seasoned Issues
o 9.4.4: Organized Exchanges versus Over-The-Counter Markets
o 9.4.5: Role of Intermediaries
• 9.5: Market Efficiency
o 9.5.1: Weak Form
o 9.5.2: Semi-strong Form
o 9.5.3: Strong Form
o 9.5.4: U.S. Stock Market Efficiency
• 9.6: Relevance for Managers
• Appendix: Understanding Bond and Stock Investment Information
• 9.7: Summary
• 9.8: Additional Readings
• 9.9: End of Chapter Problems

10. Assessing the Cost of Capital: What Investors Require
• 10.1: Understanding the Cost of Capital: An Example
• 10.2: Understanding the Implications of the Cost of Capital
• 10.3: Defining Risk
• 10.4: Estimating the Cost of Debt
• 10.5: Estimating the Cost of Preferred Shares
• 10.6: Estimating the Cost of Equity
o 10.6.1: Dividend Model Approach
o 10.6.2: Capital Asset Pricing Model
• 10.6.2.1: Risk-Free Rate
• 10.6.2.2: Market Risk Premium
• 10.6.2.3: Beta
• 10.7: Estimating Component Weights
• 10.8: Home Depot Application
• 10.9: Hurdle Rates
• 10.10: Relevance for Managers
• 10.11: Summary
• 10.12: Additional Readings
• 10.13: Problems
11. Understanding Financing and Payout Decisions
• 11.1: Capital Structure Overview
• 11.2: Understanding the Modigliani-Miller Argument: Why Capital Structure Does Not Matter
• 11.3: Relaxing the Assumptions: Why Capital Structure Does Matter
o 11.3.1: Understanding the Impact of Corporate Taxes
o 11.3.2: Understanding the Impact of Financial Distress
o 11.3.3: Combining Corporate Taxes and Financial Distress Costs
o 11.3.4: Impact of Asymmetric Information
• 11.4: Understanding Payout Policies
o 11.4.1: Paying Dividends
o 11.4.2: Repurchasing Shares
o 11.4.3: Do Dividend Policies Matter?
• 11.5: Relevance for Managers
• 11.6: Summary
• 11.7: Additional Resources
• 11.8: End of Chapter Problems
• Appendix: Why Dividend Policy Doesn’t Matter: Example

12. Designing an Optimal Capital Structure
• 12.1: Factor Affecting Financing Decisions: The FIRST Approach
o 12.1.1: Maximizing Flexibility
o 12.1.2: Impact on EPS: Minimizing Cost
• 12.1.2.1: A Simple Valuation Model
• 12.1.2.2: Earnings before Interest and Taxes Break-Even: What Leverage Really Means
• 12.1.2.3: Does Issuing Equity Dilute the Value of Existing Shares?
o 12.1.3: Minimizing Risk
o 12.1.4: Maintaining Shareholder Control
o 12.1.5: Optimal Training
• 12.2: Tradeoff Assessment: Evaluating FIRST Criteria
• 12.3: Relevance for Managers
• 12.4: Summary
• 12.5: Additional Resource
• 12.6: End of Chapter Problems

13. Measuring and Creating Value
• 13.1: An Overview of Measuring and Creating Value
• 13.2: Measuring Value: The Book Value Plus Adjustments Method
o 13.2.1: Pros and Cons of the Book Value of Equity Plus Adjustments Method
• 13.3: Measuring Value: The Discount Cash Flow Analysis Method
o 13.3.1: Estimating Free Cash Flows
o 13.3.2: Estimating the Cost of Capital
o 13.3.3: Estimating the Present Value of Free Cash Flows
o 13.3.4: Estimating the Terminal Value
o 13.3.5: Estimating the Value of Equity
o 13.3.6: Pros and Cons of the Free Cash Flow to the Firm Approach
• 13.4: Measuring Value: Relative Valuations and Comparable Analysis
o 13.4.1: The Price-Earnings Method
• 13.4.1.1: Pros and Cons of the Price-Earnings Approach
o 13.4.2: The Enterprise Value-to-EBITDA Method
• 13.4.2.1: Pros and Cons of the EV/EBITDA Approach
• 13.5: Creating Value and Value-Based Management
• 13.6: Valuing Mergers and Acquisitions
o 13.6.1: Valuing Comparable M&A Transactions
• 13.7: Relevance for Managers
• 13.8: Summary
• 13.9: Additional Readings
• 13.10: End of Chapter Problems

14. Comprehensive Case Study: Wal-Mart Stores, Inc.
• 14.1: Sizing Up Wal-Mart
o 14.1.1: Analyzing the Economy
o 14.1.2: Analyzing the Industry
o 14.1.3: Analyzing Walmart’s Strengths and Weaknesses in Operations, Marketing, Management, and Strategy
• 14.1.3.1: Analyzing Walmart’s Operations
• 14.1.3.2: Analyzing Walmart’s Marketing
• 14.1.3.3: Analyzing Walmart’s Management and Strategy
o 14.1.4: Analyzing Walmart’s Financial Health
• 14.2: Projecting Walmart’s Future Performance
o 14.2.1: Projecting Walmart’s Income Statement
o 14.2.2: Projecting Walmart’s Balance Sheet
o 14.2.3: Examining Alternate Scenarios
• 14.3: Assessing Walmart’s Long-Term Investing and Financing
o 14.3.1: Assessing Walmart’s Investments
o 14.3.2: Assessing Walmart’s Capital Raising and the Cost of Capital
• 14.4: Valuing Walmart
o 14.4.1: Measuring Walmart’s Economic Value Added
o 14.4.2: Estimating Walmart’s Intrinsic Value: The DCF Approach
o 14.4.3: Estimating Walmart’s Intrinsic Value: Comparable Analysis
o 14.4.4: Creating Value and Overall Assessment of Walmart
• 14.5: Relevance for Managers and Final Comments
• 14.6: Additional Readings and Sources of Information
• 14.7: End of Chapter Problems
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Part 1: Introduction to Financial Management
Chapter 1: Getting Started - Principles of Finance
Chapter 2: Firms and the Financial Market
Chapter 3: Understanding Financial Statements, Taxes, and Cash Flows
Chapter 4: Financial Analysis - Sizing Up Firm Performance
Part 2: Valuation of Financial Assets
Chapter 5: Time Value of Money - The Basics
Chapter 6: The Time Value of Money - Annuities and Other Topics
Chapter 7: An Introduction to Risk and Return - History of Financial Market Returns
Chapter 8: Risk and Return - Capital Market Theory
Chapter 9: Debt Valuation and Interest Rates
Chapter 10: Stock Valuation
Part 3: Capital Budgeting
Chapter 11: Investment Decision Criteria
Chapter 12: Analyzing Project Cash Flows
Chapter 13: Risk Analysis and Project Evaluation
Chapter 14: The Cost of Capital
Part 4: Capital Structure & Dividend Policy
Chapter 15: Capital Structure Policy
Chapter 16: Dividend Policy
Part 5: Liquidity Management & Special Topics in Finance
Chapter 17: Financial Forecasting and Planning
Chapter 18: Working Capital Management
Chapter 19: International Business Finance
Chapter 20: Corporate Risk Management
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PART I: INTRODUCTION TO FOREIGN EXCHANGE MARKETS AND RISKS
Chapter 1: Globalization and the Multinational Corporation
Chapter 2: The Foreign Exchange Market
Chapter 3: Forward Markets and Transaction Exchange Risk
Chapter 4: The Balance of Payments
Chapter 5: Exchange Rate Systems
PART II: INTERNATIONAL PARITY CONDITIONS AND EXCHANGE RATE DETERMINATION
Chapter 6: Interest Rate Parity
Chapter 7: Speculation and Risk in the Foreign Exchange Market
Chapter 8: Purchasing Power Parity and Real Exchange Rates
Chapter 9: Measuring and Managing Real Exchange Risk
Chapter 10: Exchange Rate Determination and Forecasting

PART III: INTERNATIONAL CAPITAL MARKETS
Chapter 11: International Debt Financing
Chapter 12: International Equity Financing
Chapter 13: International Capital Market Equilibrium
Chapter 14: Political and Country Risk

PART IV: INTERNATIONAL CORPORATE FINANCE
Chapter 15: International Capital Budgeting
Chapter 16: Additional Topics in International Capital Budgeting
Chapter 17: Risk Management and the Foreign Currency Hedging Decision
Chapter 18: Financing International Trade
Chapter 19: Managing Net Working Capital

PART V: FOREIGN CURRENCY DERIVATIVES
Chapter 20: Foreign Currency Futures and Options
Chapter 21: Interest Rate and Foreign Currency Swaps
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
PART 7: OPTIONS
20. Financial Options
21. Option Valuation
22. Real Options

PART 8: LONG-TERM FINANCING
23. Raising Equity Capital
24. Debt Financing
25. Leasing
PART 9: SHORT-TERM FINANCING
26. Working Capital Management
27. Short-Term Financial Planning
PART 10: SPECIAL TOPICS
28. Mergers and Acquisitions
29. Corporate Governance
30. Risk Management
31. International Corporate Finance
------
PART 1: INTRODUCTION
1. The Corporation
2. Introduction to Financial Statement Analysis
3. Financial Decision Making and the Law of One Price
PART 2: TIME, MONEY, AND INTEREST RATES
4. The Time Value of Money
5. Interest Rates
6. Valuing Bonds
PART 3: VALUING PROJECTS AND FIRMS
7. Investment Decision Rules
8. Fundamentals of Capital Budgeting
9. Valuing Stocks
PART 4: RISK AND RETURN
10. Capital Markets and the Pricing of Risk
11. Optimal Portfolio Choice and the Capital Asset Pricing Model
12. Estimating the Cost of Capital
13. Investor Behavior and Capital Market Efficiency
PART 5: CAPITAL STRUCTURE
14. Capital Structure in a Perfect Market
15. Debt and Taxes
16. Financial Distress, Managerial Incentives, and Information
17. Payout Policy
PART 6: ADVANCED VALUATION
18. Capital Budgeting and Valuation with Leverage
19. Valuation and Financial Modeling: A Case Study
------
------
PART 1 INTRODUCTION
Chapter 1 Corporate Finance and the Financial Manager
Chapter 2 Introduction to Financial Statement Analysis
PART 2 INTEREST RATES AND VALUING CASH FLOWS
Chapter 3 Time Value of Money: An Introduction
Chapter 4 Time Value of Money: Valuing Cash Flow Streams
Chapter 5 Interest Rates
Chapter 6 Bonds
Chapter 7 Stock Valuation
PART 3 VALUATION AND THE FIRM
Chapter 8 Investment Decision Rules
Chapter 9 Fundamentals of Capital Budgeting
Chapter 10 Stock Valuation: A Second Look
PART 4 RISK AND RETURN
Chapter 11 Risk and Return in Capital Markets
Chapter 12 Systematic Risk and the Equity Risk Premium
Chapter 13 The Cost of Capital
PART 5 LONG-TERM FINANCING
Chapter 14 Raising Equity Capital
Chapter 15 Debt Financing
PART 6 CAPITAL STRUCTURE AND PAYOUT POLICY
Chapter 16 Capital Structure
Chapter 17 Payout Policy
PART 7 FINANCIAL PLANNING AND FORECASTING
Chapter 18 Financial Modeling and Pro Forma Analysis
Chapter 19 Working Capital Management
Chapter 20 Short-Term Financial Planning
PART 8 Special Topics
Chapter 21 Option Applications and Corporate Finance
Chapter 22 Mergers and Acquisitions
Chapter 23 International Corporate Finance  

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FINANCIAL MANAGEMENT AND CORPORATE FINANCE - COLLECTION 2017 (FREE DOWNLOAD)

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University
Free download - PPT - Link
Free donwload - PPT - Link


Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business
Free download - PPT - Link

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick
Free download - PPT 1 - Link
Free download - PPT 2 - Link

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University
Free download - PPT 1 - Link
Free download - PPT 2 - Link
Free download - PPT 3 - Link

Free download Link - Core 4

Excel Modeling in Corporate Finance, 5th Edition, 2015, Craig W. Holden, Indiana University
Fundamentals of Corporate Finance, 3rd Edition, 2015, Jonathan Berk, Stanford University, Peter DeMarzo, 
Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown

 

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017
Free download - PPT  - Link


Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016
Free download - PPT  - Link


Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University
Free download - PPT  - Link


Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown, 
Free download - PPT  - Link


Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin
Free download - PPT  - Link


Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter
 Free download - PPT  - Link

 

DOWNLOAD ALL TEST BANKs & CASE STUDY GUIDES - 2017

Corporate Finance, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo, Stanford University - Test bank

Financial Management: Concepts and Applications, 2015, Stephen Foerster, Richard Ivey School of Business - Test bank

Financial Management: Core Concepts, 3rd Edition, 2016, Raymond Brooks, Oregon State University - Test bank

International Financial Management, 2nd Edition, 2012, Geert J Bekaert, Columbia University, Robert J. Hodrick - Test bank

Financial Management: Principles and Applications, 12th Edition, 2015, Sheridan Titman, Arthur J. Keown - Test bank

Corporate Finance: The Core, 4th Edition, 2017, Jonathan Berk, Stanford University, Peter DeMarzo - Test bank

Fundamentals of Investing, 13th Edition, Scott B. Smart, Lawrence J. Gitman, Michael D. Joehnk, 2017 - Test bank

Multinational Business Finance, 14th Edition, David K. Eiteman, Arthur I. Stonehill, Michael H. Moffett, 2016 - Test bank

Personal Finance, 6th Edition, 2017, Jeff Madura, Emeritus Professor of Finance; Florida Atlantic University - Test bank

Personal Finance: Turning Money into Wealth, 7th Edition, 2016, Arthur J. Keown - Test bank

Foundations of Finance, 9th Edition, 2017, Arthur J. Keown, John H. Martin - Test bank

Principles of Managerial Finance, 14th Edition, 2015, Lawrence J. Gitman, Chad J. Zutter - Test bank

 

------

For Test Bankz, Quiz Answers and Case study Guides, email to: This email address is being protected from spambots. You need JavaScript enabled to view it.

All Free downloads - LINK

 

Good Luck and Success, Enjoy Your Study !

 

 

 

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