Shepard Industries had NI in the year just ended of $10 million. It spent $6 million...

 

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Shepard Industries had NI in the year just ended of $10 million. It spent $6 million on total capital expenditures and increases in net working capital and had $14 million in depreciation expenses. Shepard is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%. a. If Shepard could borrow under 8% interest rate, how much it could have borrowed to maximize value of the interest tax shield? b. Find debt-to-value ratio if Shepard borrows the amount you found in a). Assume that Shepard is expected to grow at 3% annually perpetually. Shepard Industries had NI in the year just ended of $10 million. It spent $6 million on total capital expenditures and increases in net working capital and had $14 million in depreciation expenses. Shepard is currently an all-equity firm with a corporate tax rate of 35% and a cost of capital of 10%. a. If Shepard could borrow under 8% interest rate, how much it could have borrowed to maximize value of the interest tax shield? b. Find debt-to-value ratio if Shepard borrows the amount you found in a). Assume that Shepard is expected to grow at 3% annually perpetually.

Answer rating: 100% (QA)

a To calculate the optimal amount Shepard Industries should borrow to maximize the value of the inte... View the full answer