1.Firm Z expects an EBIT of $19,750 every year forever.It currently has no debt.Its cost of equity is 15%.The firm can borrow at 10%.If the tax rate is 35%,what is the value of the firm?
2.Refer to question#1.what would the value be if the firm uses 50%debt?
3.A firm has zero debt in its capital structure.Its overall cost of capital is 9%.The firm is considering a new capital structure with 40% debt.The interest rate on the debt would be 4%.Assuming that the corporate tax rate is 34%,what would be its cost of equity capital with the new capital structure?
4.A firm has a debt to ratio of 1.75.If it had no debt,its cost of equity would be 9%.Its cost of debt is 7%,waht is its cost of equity if the corporate tax rate is 50%?
5.You are asked to evaluate two machines.The benefit from ownership are identical.Machine Z costs $300 to buy and install,lasts for 5 years,and costs $160 per year to operate.Machine D costs$500,lasts for 7 years,and costs $120 per year to operate.Both machines have zero salvage.Assuming that the machines will br replaced in perpetuity when they wear out,which machine do you recommend if the cost of capital is 15%
6.Phone-Pizza Inc.is considering the acquisition of new baking machine that will last for 20 years.The machine costs$500,000 and belongs to CCA Class 8(CCA rate=20%).The machine would require an investment in net working capital of $25000 in year 1.The machine will generate an annual pre-tax operating revenue of $150000.The firm's marginal tax rate is 40%.Find the after-tax operating cash flow for year2
7.What is the present value of the tax shield associated with the purchase of a $100,000 asset that will have a useful life of 10 years?The asset will be sold at a market value of %15000 at the end of its useful life and is one of many assets in an asset class with a CCA rate of 20%.The company has a 10% cost of capital and a tax rate of 36%
8.Company ABC,an all equity firm.is considering the formation of a new division,which will increase the assets of the firm by 50%.ABC currently has a required rate of return
of 18%.Treasury bonds yield is 7%,abd the market risk premium is 5%.If ABC wants to reduce its required rate of return to 16%,what is the beta coefficient of the new division?