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    Debt-Equity, APV, and WACC

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    Problem 14-2
    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 a shareholder be if the firm borrows $20 more and uses it to repurchase stock?"

    Problem 14-24
    Some companies' debt-equity targets are expressed not as a debt ratio, but as a target debt rating on a firm's outstanding bonds. What are the pros and cons of setting a target rating, rather than a target ratio?

    Problem 15-6

    A project costs $1 million and has a base-case NPV of exactly zero (NPV = 0). What is the project's APV in the following cases?
    a. If the firm invests, it has to raise $500,000 by a stock issue. Issue costs are 15% of net proceeds.
    b. If the firm invests, its debt capacity increases by $500,000. The present value of interest tax shields on this debt is $76,000.

    Problem 15-9
    The WACC formula seems to imply that debt is "cheaper" than equity--that is, that a firm with more debt could use a lower discount rate. Does this make sense? Explain briefly.

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    Solution Summary

    Answers Corporate Finance Questions on MM, Debt-Equity, APV, and WACC.

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