Q: The present value of interest tax shields is often written as TcD
The present value of interest tax shields is often written as TcD, where D is the amount of debt and Tc is the marginal corporate tax rate. Under what assumptions is this present value correct?
See AnswerQ: Here are book and market value balance sheets of the United Frypan
Here are book and market value balance sheets of the United Frypan Company (UF): Assume that MM’s theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a...
See AnswerQ: What is the relative tax advantage of corporate debt if the corporate
What is the relative tax advantage of corporate debt if the corporate tax rate is Tc = .35, the personal tax rate is Tp = .35, but all equity income is received as capital gains and escapes tax entire...
See AnswerQ: “The firm can’t use interest tax shields unless it has (
“The firm can’t use interest tax shields unless it has (taxable) income to shield.” What does this statement imply for debt policy? Explain briefly.
See AnswerQ: On February 29, 2015, when PDQ Computers announced bankruptcy,
On February 29, 2015, when PDQ Computers announced bankruptcy, its share price fell from $3.00 to $.50 per share. There were 10 million shares outstanding. Does that imply bankruptcy costs of 10 × (3....
See AnswerQ: The traditional theory of optimal capital structure states that firms trade off
The traditional theory of optimal capital structure states that firms trade off corporate interest tax shields against the possible costs of financial distress due to borrowing. What does this theory...
See AnswerQ: Rajan and Zingales identified four variables that seemed to explain differences in
Rajan and Zingales identified four variables that seemed to explain differences in debt ratios in several countries. What are the four variables?
See AnswerQ: How would your answer to Problem 10 change if technological improvements reduce
How would your answer to Problem 10 change if technological improvements reduce the cost of new BG production facilities by 3% per year? Thus a new plant built in year 1 would cost only 25 (1 – .03) =...
See AnswerQ: Fill in the blanks: According to the pecking-order theory
Fill in the blanks: According to the pecking-order theory, a. The firm’s debt ratio is determined by ________. b. Debt ratios depend on past profitability, because ______.
See AnswerQ: For what kinds of companies is financial slack most valuable? Are
For what kinds of companies is financial slack most valuable? Are there situations in which financial slack should be reduced by borrowing and paying out the proceeds to the stockholders? Explain.
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