BUSINESS COLLEGE

Firm A and B have identical business except that their financing is different: Firm A: EBIT = X = $10, D = $20 Firm B: EBIT = X = $10, D = $80 Suppose that corporate tax rate TC is 40%, cost of debt is RD is 10% for both. Please answer the following questions: Note: If your choice is A, then type in A. Do not type (A) or anything else. 1. Which firm has a greater FCF (free cash flow)? Your answer: (A) Firm A (B) Firm B (C) Both have the same FCF (D) Hard to say 2. What is firm A’s (annual) tax shield? Your answer: (A) $0 (B) $0.8 (C) $8 (D) $4 (E) Hard to say 3. What is firm B’s (annual) tax shield? Your answer: (A) $0 (B) $0.32 (C) $3.2 (D) $8 (E) Hard to say

Answers

Answer 1

Answer:

Answer:

1. Which firm has a greater FCF (free cash flow)?

(A) Firm A

2. What is firm A’s (annual) tax shield?

(B) $0.8

3. What is firm B’s (annual) tax shield?

Explanation:

since firm A's debt is $20, its value is $100, then its equity = $80

since firm B's debt is $80, its value is $100, then its equity = $20

Firm A's cash flow = (EBIT - interest expense) x (1 - tax rate) = [$10 - ($20 x 10%)] x 0.6 = $4.80

Firm B's cash flow = (EBIT - interest expense) x (1 - tax rate) = [$10 - ($80 x 10%)] x 0.6 = $1.20

Firm A's annual tax shield = taxable interest x tax rate = ($20 x 10%) x 40% = $0.80

Firm B's annual tax shield = taxable interest x tax rate = ($80 x 10%) x 40% = $3.20

Answer 2

Answer:

Final answer:

Firm B has a greater FCF compared to Firm A. Firm A has a tax shield of $0, and Firm B has a tax shield of $3.2.

Explanation:

1. Firm B has a greater Free Cash Flow (FCF) compared to Firm A. FCF is calculated as EBIT(1-TC) + TC(D-RD), and in this case, Firm B has a higher outstanding debt which leads to a higher tax shield, resulting in a greater FCF for Firm B.

2. Firm A's annual tax shield can be calculated by subtracting the debt payments from the earnings before interest and taxes (EBIT) and then multiplying the result by the tax rate. In this case, the annual tax shield for Firm A is $0, as the interest expense is greater than the taxable income.

3. Firm B's annual tax shield can be calculated in the same way as Firm A's. In this case, the annual tax shield for Firm B is $3.2. This is because the debt payments are lower than the taxable income and result in a tax shield.

Learn more about Free Cash Flow here:

brainly.com/question/34881412

#SPJ3

Related Questions

The following is a comprehensive problem which encompasses all of the elements learned in previous chapters. You can refer to the objectives for each chapter covered as a review of the concepts. Kelly Pitney began her consulting business, Kelly Consulting, on April 1, 2014. The chart of accounts for Kelly Consulting is shown below:Cash 31 Kelly Pitney, Capital 12 Accounts Receivable 32 Kelly Pitney, Drawing 14 Supplies 33 Income Summary 15 Prepaid Rent 41 Fees Earned 16 Prepaid Insurance 51 Salary Expense 52 Rent Expense 18 Office Equipment 19 Accumulated Depreciation 53 Supplies Expense 21 Accounts Payable 54 Depreciation Expense 55 Insurance Expense 22 Salaries Payable 23 Unearned Fees 59 Miscellaneous ExpenseRequired: Journalize each of the May transactions using Kelly Consulting's chart of accounts. (Do not insert the account numbers in the Post. Ref. column of the journal at this time.) For a compound transaction, if an amount box does not require an entry, leave it blank.
CoffeeStop primarily sells coffee. It recently introduced a premium coffee-flavored liquor (BF Liquors). Suppose the firm faces a tax rate of 40 % and collects the following information. If it plans to finance 12 % of the new liquor-focused division with debt and the rest with equity, what WACC should it use for its liquor division? Assume a cost of debt of 5.4 %, a risk-free rate of 3.5 %, and a market risk premium of 6.9 %.
You have $11,000 and will invest the money at an interest rate of .33 percent per month until the account is worth $17,200. How many years do you have to wait until you reach your target account value
Suppose Compco Systems pays no dividends but spent $ 5.18 billion on share repurchases last year. If Compco's equity cost of capital is 11.5 %, and if the amount spent on repurchases is expected to grow by 7.9 % per year, estimate Compco's market capitalization. If Compco has 5.8 billion shares outstanding, to what stock price does this correspond? Compco's market capitalization will be $ nothing billion. (Round to two decimal places.) Compco's stock price will be $ nothing. (Round to the nearest cent.)
Rossdale Co. stock currently sells for $68.91 per share and has a beta of .88. The market risk premium is 7.10 percent and the risk-free rate is 2.91 percent annually. The company just paid a dividend of $3.57 per share, which it has pledged to increase at an annual rate of 3.25 percent indefinitely. What is your best estimate of the company's cost of equity?

In the current year, Tim sells Section 1245 property for $28,000 that he had purchased 6 years ago. Tim has claimed $7,000 in depreciation on the property and originally purchased it for $20,000. How much of the gain is taxable as ordinary income

Answers

Answer: $7,000

Explanation:

Section 1245 property refers to property that either could depreciate or has depreciated or been amortized showing that it refers to both tangible and intangible assets.

If this asset is sold and there is a gain, the amount of the gain that is taxable as ordinary income is the amount up to the amount of depreciation.

As there has been a gain in this sale because the sales price is more than the purchase price and the Depreciation is $7,000, that is the amount that will be taxable as ordinary income.

Hayes Corp. is a manufacturer of truck trailers. On January 1, 2021, Hayes Corp. leases ten trailers to Lester Company under a six-year non-cancelable lease agreement. The following information about the lease and the trailers is provided: 1) Annual payment of $120,175 is due on January 1, 2021 and at December 31 from 2021 to 2025. Hayes Corp. has an implicit rate of 8% (present value factor for 6 periods at 8% is 4.99271). 2) Titles to the trailers pass to Lester at the end of the lease. 3) The fair value of each trailer is $60,000. The cost of each trailer to Hayes Corp. is $54,000. Each trailer has an expected useful life of nine years. 4) Collectibility of the lease payments is probable. Instructions (a) What type of lease is this for the Lester Company and Hayes Corp? (b) Prepare a lease amortization schedule for Lester Company till 12/31/2021. (c) Prepare the journal entries for Lester Company on 1/1/2021 and 12/31/2021. Round all amounts to the nearest dollar.

Answers

Answer:

FINANCING LEASE.

$\left[\begin{array}{cccccc}YEAR&Beginning&Cuota&Interest&amortization&Ending\n0&600000&120175&0&120175&479825\n1&479825&120175&38386&81789&398036\n2&398036&120175&31842.88&88332.12&309703.88\n3&309703.88&120175&24776.31&95398.69&214305.19\n4&214305.19&120175&17144.42&103030.58&111274.61\n5&111274.61&120175&8901.97&111273.03&1.58\n\end{array}\right]$

trailer 600,000 debit

lease liability 479,825 credit

cash 120,175 credit

--to record Jan 1st entry--

interest expense 38,386 debit

lease liability 81,789 credit

cash 120,175 credit

--to record Dec 31st entry--

Explanation:

The lease is for more than half of the asset useful life. Also, it has a present value equal to the fair value of the trailer. Also, ownership is acquired at the end of the lease life.

To build the schedule we calculate the interest on the principal

then, we subtract that from the installment to get the principal amortization and solve for the remaining at year-end

we repeat this procedure during the life of the lease.

Jan 1st, 2021

the journal entries will recognize the lease liability, the cash from the first payment, and the trailers received

Dec 31st, 2021

Here we must recognize the interest expense as well as the decrease in the lease liability.

Assume that your credit sales for March was $12,764,for April was $27,406 and May was $28,706. If credit sales are collected 55% during the month of sale, 25% the month following the sale, and 15% in the second month following the sale, what is the total expected cash collections to be received in May? Round your answer to one dollar.

Answers

Answer:

Total expected cash collections for May are $24554

Explanation:

The May's cash collections will include collections from March's credit sales worth 15% of March's sales, collections for April's credit sales worth 25% of April's credit sales and collections worth 55% of t=May's credit sales. Thus the collections are,

Collection for March's sales = 12764 * 0.15 = $1914.6

Collection for April's sales = 27406 * 0.25 = $6851.5

Collection for May's sales = 28706 * 0.55 = $15788.3

Total expected cash collections for May = 1914.6 + 6851.5 + 15788.3

Total expected cash collections for May = $24554.4 rounded off to $24554

Johnson Enterprises uses a computer to handle its sales invoices. Lately, business has been so good that it takes an extra 3 hours per night, plus every third Saturday, to keep up with the volume of sales invoices. Management is considering updating its computer with a faster model that would eliminate all of the overtime processing.Current Machine New Machine
Original purchase cost $15,230 $25,080
Accumulated depreciation $ 6,800 _
Estimated annual operating costs $24,950 $19,560
Useful life 5 years 5 years

If sold now, the current machine would have a salvage value of $8,490. If operated for the remainder of its useful life, the current machine would have zero salvage value. The new machine is expected to have zero salvage value after 5 years.

Prepare an incremental analysis. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answers

Answer:

The incremental cost is ($10,360)

Explanation:

Analysis of total cost over the 5 year period

Retain Old Machine Buy New Machine

Variable / Incremental Operating

Costs

Old Machine 124,750

New Machine 97,800

Old Machine Book Value

Retain: Annual depreciation 8,430

Buy : Lump sum written off 8,430

Old Machine Disposal (8,490)

Purchase Cost of New Machine 25,080

Total Cost 133,180 122,820

The use of new machine will result in lower cost for the next 5 years.The incremental cost is ($10,360)

William owns 1 share of Park stock. He purchased the stock three years ago for $17.50. The stock is currently trading for $40 per share. The stock has paid the following dividends over the past three years. o Year 1: $1.00. o Year 2: $2.00. o Year 3: $3.00. What is the compounded rate of return (IRR) that William has earned on this investment

Answers

Answer:

sim eu também preciso desta respota

A cafeteria buys muffins daily. Demand varies Uniformly between 30 and 50 muffins per day. The cafeteria pays $.20 per muffin and charges $.80 per muffin. Unsold muffins are discarded at the end of the day. A) Find the optimal stocking level and the stock-out risk for that quantity.

Answers

Answer:

The optimal stocking level is 45 muffins.

Explanation:

First we have to calculate the Overage cost Co = Purchase price - Salvage value = $0.2 - 0 = $0.2

Then the Underage cost Cu = Selling price - Purchase price =$0.80 - $0.2 = $0.60

Service level = Cu / (Cu + Co) = $0.60/($0.60+$0.2) = $0.75

Hence, optimal stocking level = Minimum demand + Service level *(Maximum demand - Minimum demand)

optimal stocking level = 30 + 0.75*(50-30) = 45

The optimal stocking level is 45 muffins.

Optimal stocking level = 68.75 Muffins

Other Questions

The composition of the Fingroup Fund portfolio is as follows: Stock Shares Price A 320,000 $ 40 B 420,000 45 C 520,000 10 D 720,000 15 The fund has not borrowed any funds, but its accrued management fee with the portfolio manager currently totals $40,000. There are 6 million shares outstanding. What is the net asset value of the fund

OS Environmental provides cost-effective solutions for managing regulatory requirements and environmental needs specific to the airline industry. Assume that on July 1 the company issues a one-year note for the amount of $5.2 million. Interest is payable at maturity.Determine the amount of interest expense that should be recorded in a year-end adjusting entry under each of the following independent assumptions:Interest rate Fiscal year-end Interest expense12% December 31 10% September 30 9% October 31 6% January 31

Marketing Docs prepares marketing plans for growing businesses. For 2017, budgeted revenues are $1,500,000 based on 500 marketing plans at an average rate per plan of $3,000. The company would like to achieve a margin of safety percentage of at least 45%. The company’s current fixed costs are $400,000 and variable costs average $2,000 per marketing plan. (Consider each of the following separately.) Required Calculate Marketing Docs’ breakeven point and margin of safety in units. Which of the following changes would help Marketing Docs achieve its desired margin of safety? The average revenue per customer increases to $4,000. The planned number of marketing plans prepared increases by 5%. Marketing Docs purchases new software that results in a 5% increase to fixed costs but reduces variable costs by 10% per marketing plan.

In general, what are the benefits of the Internet to (i) the business person, (ii) an organization, (iii) a nation and (iv) a global society