14.4 Assume that the real riskless interest rate is zero and the corporate tax rate is 12.5 per cent. TAL Industries can borrow at the riskless interest rate. It will have an inflation-adjusted EBIT next year of €200 million. It would like to borrow €50 million today. Its only deductions will be interest payments (if any). a What are its interest payments, taxable income, tax payments and income left for share- holders in a no-inflation environment? b Suppose there is inflation of 10 per cent per year, but the real interest rate stays at zero. This means that investors now will require a sure payment of €1.10 next year for each €1.00 loaned today. Repeat part a, assuming that EBIT is affected by inflation. Exercises 493 c In which environment is the inflation-adjusted income left for shareholders higher? Why?
14.4 Assume that the real riskless interest rate is zero and the corporate tax rate is 12.5 per cent. TAL Industries can borrow at the riskless interest rate. It will have an inflation-adjusted EBIT next year of €200 million. It would like to borrow €50 million today. Its only deductions will be interest payments (if any). a What are its interest payments, taxable income, tax payments and income left for share- holders in a no-inflation environment? b Suppose there is inflation of 10 per cent per year, but the real interest rate stays at zero. This means that investors now will require a sure payment of €1.10 next year for each €1.00 loaned today. Repeat part a, assuming that EBIT is affected by inflation. Exercises 493 c In which environment is the inflation-adjusted income left for shareholders higher? Why?
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter24: Enterprise Risk Management
Section: Chapter Questions
Problem 4P
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