15-5. Your firm currently has $100 million in debt outstanding with a 10% interest rate. The terms of the loan require the firm to repay $25 million of the balance each year. Suppose that the marginal corporate tax rate is 40%, and that the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt?

15-10. Rogot Instruments makes fine Violins and Cellos. It has $1 million in debt outstanding, equity valued at $2 million, and pays corporate income tax at rate 35%. Its cost of equity is 12% and its cost of debt is 7%.

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a. What is Rogots pretax WACC?

b. What is Rogots (effective after-tax) WACC?

15-16. Milton Industries expects free cash flow of $5 million each year. Miltons corporate tax rate is 35%, and its unlevered cost of capital is 15%. The firm also has outstanding debt of $19.05 million, and it expects to maintain this level of debt permanently.

a. What is the value of Milton Industries without leverage?

b. What is the value of Milton Industries with leverage?

15-18. Kurz Manufacturing is currently an all-equity firm with 20 million shares outstanding and a stock price of $7.50 per share. Although investors currently expect Kurz to remain an all-equity firm, Kurz plans to announce that it will borrow $50 million and use the funds to repurchase shares. Kurz will pay interest only on this debt, and it has no further plans to increase or decrease the amount of debt. Kurz is subject to a 40% corporate tax rate.

a. What is the market value of Kurzs existing assets before the announcement?

b. What is the market value of Kurzs assets (including any tax shields) just after the debt is issued, but before the shares are repurchased?

c. What is Kurzs share price just before the share repurchase? How many shares will Kurz repurchase?

d. What are Kurzs market value balance sheet and share price after the share repurchase?

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