Guidance needed on problems on
marketing and investment
2. Grommit Engineering expects to
have net income next year of $20.75 million and free cash flow of $22.15
million. Grommit’s marginal corporate tax rate is 35%.
a. If Grommit increases leverage
so that its interest expense rises by $1million, how will its net income
change.
b. For the same increase in
interest expense, how will free cash flow change?
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 rate shields from this debt?
16. Milton Industries expects free
cash flow of $5million each year. Milton’s corporate tax rate is 35%, and its
unleveled cost of capital is 15%. The firm also has outstanding debt of $19.05
milllion 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?
25. With its current leverage,
Impi Corporation will have net income next year of $4.5 million. If Impi’s
corporate tax rate is 35% and it pays 8% interest on its debt, how much
additional debt can Impi issue this year and still receive the benefit of the interest
tax shield next year?
