Questions from Corporate Finance

Q: Assume that personal investors pay a 40% tax rate on interest

Assume that personal investors pay a 40% tax rate on interest income and only a 20% tax rate on equity income. If the corporate tax rate is 30%, estimate whether debt has a tax benefit, relative to eq...

Q: Handy and Harman, a leading fabricator of precious metal alloys,

Handy and Harman, a leading fabricator of precious metal alloys, pays out only 23% of its earnings as dividends. The average dividend payout ratio for metal fabricating firms is 45%. The average growt...

Q: XYZ Pharma is a pharmaceutical company that traditionally has not used debt

XYZ Pharma is a pharmaceutical company that traditionally has not used debt to finance its projects. Over the past 10 years, it has also reported high returns on its projects and growth and made subst...

Q: Unitrode, which makes analog/linear integrated circuits for power management

Unitrode, which makes analog/linear integrated circuits for power management, is a firm that has not used debt in the financing of its projects. The managers of the firm contend that they do not borro...

Q: Consolidated Power is a regulated electric utility that has equity with a

Consolidated Power is a regulated electric utility that has equity with a market value of $1.5 billion and debt outstanding of $3 billion. A consultant notes that this is a high debt ratio relative to...

Q: In December 1995, Boise Cascade’s stock had a beta of 0

In December 1995, Boise Cascade’s stock had a beta of 0.95. The Treasury bill rate at the time was 5.8%, and the Treasury bond rate was 6.4%. The firm had debt out- standing of $1.7 billion and a mark...

Q: Stockholders can transfer wealth from bondholders through a variety of actions.

Stockholders can transfer wealth from bondholders through a variety of actions. How would the following actions by stockholders transfer wealth from bondholders? a. An increase in dividends b. A lever...

Q: The following table summarizes the annual returns you would have made on

The following table summarizes the annual returns you would have made on two companies—Scientific Atlanta, a satellite and data equipment manufacturer, and AT&T, the telecomm gia...

Q: Biogen, a biotechnology firm, had a beta of 1.

Biogen, a biotechnology firm, had a beta of 1.70 in 1995. It had no debt outstanding at the end of that year. a. Estimate the cost of equity for Biogen, if the Treasury bond rate is 6.4%. b. What effe...

Q: Consider again the project described in Problem 1 (assume that the

Consider again the project described in Problem 1 (assume that the depreciation reverts to a straight line). Assume that 40% of the initial investment for the project will be financed with debt, with...