Southern Timber Company expects to have an EBIT of $10 million in the coming year, and its EBIT is expected to grow at a rate of 4% after that. Southern Timber is currently an unlevered firm with a cost of capital of 6%. The corporate tax rate is 30%. A panel of professional financial experts indicates that the company can enjoy a tax shield benefit of $35 million in firm value if the company changes its capital structure by allowing a certain amount of debt. What would be the value of Southern Timber Company if it decides to undertake the capital structure suggested by these financial experts? O 385 O 380 O 375 O 370

Southern Timber Company expects to have an EBIT of $10 million in the coming year, and its EBIT is expected to grow at a rate of 4% after that. Southern Timber is currently an unlevered firm with a cost of capital of 6%. The corporate tax rate is 30%. A panel of professional financial experts indicates that the company can enjoy a tax shield benefit of $35 million in firm value if the company changes its capital structure by allowing a certain amount of debt. What would be the value of Southern Timber Company if it decides to undertake the capital structure suggested by these financial experts? O 385 O 380 O 375 O 370

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter11: Cash Flow Estimation And Risk Analysis

Section: Chapter Questions

Problem 8P

See similar textbooks

Similar questions

Southern Timber Company expects to earn $10 million in EBIT in the coming year. After that, its EBIT is expected to grow by 4% per year in perpetuity. Southern Timber is currently an unlevered firm with a cost of capital of 6%. The corporate tax rate is 30%. A panel of professional financial experts indicates that the company can enjoy a tax shield benefit of $20 million in firm value if the company changes its capital structure by allowing a certain amount of debt. What would be the value of Southern Timber Company if it decides to undertake the capital structure suggested by these financial experts?
Southern Timber Company expects to earn $10 million in EBIT in the coming year. After that,its EBIT is expected to grow by 4% per year in perpetuity. Southern Timber is currently anunlevered firm with a cost of capital of 6%. The corporate tax rate is 30%. A panel ofprofessional financial experts indicates that the company can enjoy a tax shield benefit of $20million in firm value if the company changes its capital structure by allowing a certain amountof debt. What would be the value of Southern Timber Company if it decides to undertake thecapital structure suggested by these financial experts?
Fast Securities Ltd is looking into an investment of $100,000. The investment is expected to generate a net operating profit after tax (NOPAT) of $20,000. Given the firm’s weighted average cost of capital of 10% and tax rate of 20%, calculate the economic value added (EVA) of the investment. Should the firm accept or reject the investment? Give your reason(s).
Southern Timber Company expects to earn $10 million in EBIT in the coming year. After that,its EBIT is expected to grow by 4% per year in perpetuity. Southern Timber is currently anunlevered firm with a cost of capital of 6%. The corporate tax rate is 30%. A panel ofprofessional financial experts indicates that the company can enjoy a tax shield benefit of $20million in firm value if the company changes its capital structure by allowing a certain amountof debt. What would be the value of Southern Timber Company if it decides to undertake thecapital structure suggested by these financial experts? handwrite please
A corporation plans to buy out a supplier and needs $2 million in new capital to do so. The proportion of equity to debt financing will be 40:60 for the acquisition. The current cost of equity capital is 14% after taxes, and it is 12% before taxes for debt financing. The effective income-tax rate is 55% . What is the minimum amount of before-tax earnings necessary per year from the purchase to justify raising the required capital ? What minimum after-tax earnings should be expected?
Suppose that Corporation is to consider a new project that requires $0.8 million finance with the interest rate of 10% and is expected to generate additional cash flow of $120,000 each year. In terms of financing, the firm is to borrow the money from David Lee, the owner of the firm. Assuming the cost of capital for all equity firm is 10%, compute the value of this firm if the corporate tax of 50% is imposed.
Pack-and-Send, Inc. expects to have free cash flow of $6.5 million next year and this cash flow will grow at a rate of 6% per year thereafter. The firm's equity cost of capital is 9% and its debt cost of capital is 5%. Assume that Pack-and-Send has a corporate tax rate of 30%. If the firm maintains a debt-to-equity ratio of 0.60, the value of the firm's tax shield is closest to: options: $18.47 million $27.95 million $54.28 million $260.00 million None of the above
Bob-Bye, Inc. has asked its financial manager to measure the cost of each specific type of capital as well as the weighted average cost of capital. The WACC is to be measured by using the following weights:: 40% long term debt, 10% preferred stock, and 50% common stock equity (retained earnings,new common stock or both). The firm’s tax is 30%. Debt: The firm can sell for P980, a 10-year, P1,000 par value bond paying annual interest at 13% coupon rate. A flotation cost of 3% of the par value is required in addition to the discount of P20 per bond. Preferred Stock: 8 percent (annual divided) preferred stock having a par value of P100 can be sold for P65. An additional fee of P2 per share must be paid to the underwriters. Common Stock: The firm’s common stock is currently selling for P50 per share. The dividend expected to be paid at the end of the coming year is P4 per share.. Its dividend payments which have been approximately 60% of earnings per share in each of the past 5…
Kielly Machines Inc. is planning an expansion program estimated to cost $100 million. Kielly is going to raise funds according to its target capital structure shown below. Debt 0.30 Preferred stock 0.24 Equity 0.46 Kielly had net income available to common shareholders of $184 million last year of which 75% was paid out in dividends. The company has a marginal tax rate of 40%. Additional data: The before-tax cost of debt is estimated to be 11%. The market yield of preferred stock is estimated to be 12%. The after-tax cost of common stock is estimated to be 16% What is Kielly's weighted average cost of capital? Select one: a. 14.00% b. 12.22% c. 13.54% d. 13.00%
Antonio's is analyzing a project with an initial cost of $39,000 and cash inflows of $25,000 a year for 2 years. This project is an extension of the firm's current operations and thus is equally as risky as the current firm. The firm uses only debt and common stock to finance their operations and maintains a debt-equity ratio of 0.8. The pre-tax cost of debt is 7.8 percent and the cost of equity is 11.4 percent. The tax rate is 34 percent. What is the projected net present value of this project? Multiple Choice $3.435.10 $5,204.70
Power Development Incorporation is expecting earnings before interest and taxes of P2 million for the next year. The cost of equity is 15%. The company has a long-term debt of P5,000,000 on which the firm pays 10%. One million ordinary shares are outstanding. The firm’s capital structure is funded by 40% debt and 60% equity. The applicable tax rate is 40%. Next year Power Development Inc. expects to fun its positive net present value project costing P1.2 million, on which the funding will be the same as the firm’s capital structure. Assume also that any new debt will also have an interest rate of 10%. The firm will follow a residual dividend model and no other projects will be funded next year.1. How much of the income will be declared as dividend?2. What is the retention ratio? In percentage, put percentage sign
Power Development Incorporation is expecting earnings before interest and taxes of P2 million for the next year. The cost of equity is 15%. The company has a long-term debt of P5,000,000 on which the firm pays 10%. One million ordinary shares are outstanding. The firm’s capital structure is funded by 40% debt and 60% equity. The applicable tax rate is 40%. Next year Power Development Inc. expects to fun its positive net present value project costing P1.2 million, on which the funding will be the same as the firm’s capital structure. Assume also that any new debt will also have an interest rate of 10%. The firm will follow a residual dividend model and no other projects will be funded next year. How much of the income will be declared as dividend? What is the retention ratio?