Tax and Gearing

W22Extra evaluate and geartrain More Questions Multiple Choice 1) Which of the following statements is ludicrous? A) In general, the gain to investors from the impose deductibility of divert sufferments is referred to as the interest task protect. B) The interest tax shield is the additional amount that a stiff would down paid in taxes if it did non have leverage. C) Because Corporations pay taxes on their profits after interest payments are deducted, interest write downs reduce the amount of corporate tax unswervings must pay. D) As Modigliani and Miller made unaccented in their original work, capital social system results in perfect capital foodstuffs.Thus, if capital structure does not matter, then it must stem from a foodstuff imperfection. 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. rosewood tree Indust ries has EBIT of $450 one billion one one gazillion zillion million million, interest write down of $175 million, and a corporate tax rate of 35%. 2) Rosewoods terminate income is walk-to(prenominal) to A) $450 million B) $180 million C) $290 million D) $95 million Net income = (EBIT spare-time activity expense)(1 ?C) = (450 175)(1 . 35) = $178. 75 3) The total of Rosewoods enlighten income and interest payments is at hand(predicate) to A) $270 million B) $355 million C) $290 million D) $450 million Net income + engagement = (EBIT raise expense)(1 ? C) = (450 175)(1 . 35) = $178. 75 + $175 = $353. 73 4) If Rosewood had no interest expense, its net income would be juxtaposed to A) $405 million B) $160 million C) $450 million D) $290 million Net income = (EBIT Interest expense)(1 ? C) = (450 0)(1 . 35) = $292. 50 5) The amount of Rosewoods interest tax shield is closest to A) $115 million B) $290 millionC) $175 million D) $60 million Interest tax shield = In terest expense(? C) = 175(. 35) = $61. 25 aviate by Night Aviation (FBNA) expects to have net profit available for shareholders next year of ? 24 million and acquit Cash Flow of ? 27 million. FBNAs marginal corporate tax rate is 40%. 6) Establish FBNAs EBIT A) ? 43 million B) ? 40 million C) ? 45 million D) ? 60 million EBIT = NI + Taxes + Interest expense FCF = NI + Interest expense = 27 = 24 + interest expense = 3 (EBIT Interest Expense)(1 0. ) = NI (EBIT 3)(0. 6) = 24 (EBIT 3) = 24/0. 6 = 40 EBIT = 40 + 3 = $43 7) IF FBNA increases leverage so that its interest expense rises by ? 1 million, then the amount its profit for shareholders will flip-flop is closest to A) -? 400,000 B) -? 600,000 C) ? 400,000 D) ? 600,000 (EBIT Interest Expense chg IE)(1 0. 4) = NI + chg NI (- chg IE)(0. 6) = chg NI -1m (. 6) = -600,000 Or, -$1m (1 . 4) = -$600,000 8) IF FBNA increases leverage so that its interest expense rises by ? 1 million, then the amount its Free Cash flow will change is closest to A) -? 600,000 B) -? 400,000C) ? 600,000 D) ? 400,000 FCF = NI + Interest expense chg FCF = chg NI + chg Interest expense = 600,000 + 1m = +400,000 Or, $1m (0. 4) = $400,000 LCMS Industries has ? 70 million in debt outstanding. The firm will pay moreover 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. 9) LCMS annual interest tax shield is closest to A) ? 2. 8 million B) ? 2. 0 million C) ? 3. 6 million D) ? 5. 6 million Annual Tax shield= annual debt interest ? C = ? 70M ? 0. 08 ? .35 = 1. 96M 10) assuming that the risk is the same as the loan, the present honour of LCMS interest tax shield is closest to A) ? 45. 5 million B) ? 20. 0 million C) ? 24. 5 million D) ? 35. 0 million PV of Tax shield = debt ? ?C = ? 70M ? .35 = 24. 5M 11) Assuming that the risk of the tax shield is only 6% even though the loan pays 8%, then the present value of LCMS interest tax shield is closest to A) ? 24. 5 million B) ? 18 million C) ? 33. 0 million D) ? $20. 0 million PV of Tax shield = debt ? ?C ? rD / rD2 = $70M ? .35 ? .08/. 06 = 32. 67