Finc600 Week 6 Assignment - Homework Problems

finc600 Week 6 Assignment - Homework Problems
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Complete the following problems in either Microsoft Word or Excel.

Your work must be organized. Highlight your final answer.

Chapter 14
14-2:
Here are book- and market-value balance sheets of the United Frypan Company (UF):
Book Market
Net Working Capital $20       $40   Debt             Net Working Capital $20     $40 Debt
Long-term asset         $80       $60   Equity             Long-term Assets     $140   $120 Equity
$100     $100 $160   $160
(The middle-of-the-road party was founded in 1961 by Miller and Modigliani, always referred to as “MM”, when they published a proof that dividend policy is irrelevant in a world without taxes, transaction costs, or other market imperfections.   MM argued as follows. Suppose your firm has settled on its investment program. You have a plan to finance the investments with cash on hand, additional borrowing, and reinvestment of future earnings. Any surplus cash is to be paid out as dividends.) Assume that MM’s theory holds with taxes. There is no growth, and the $40 of debt is expected to be permanent. Assume a 40% corporate tax rate.
a. How much of the firm’s value is accounted for by the debt-generated tax shield?
b. How much better off will UF’s shareholders be if the firm borrows $20 more and uses it to repurchase stock?

14-3:
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 entirely (TpE = 0)? How does the relative tax advantage change if the company decides to pay out all equity income as cash dividends that are taxed at 15%?

Chapter 15
15-1:
Calculate the weighted-average cost of capital (WACC) for Federated Junkyards of America, using the following information:
• Debt: $75,000,000 book...