le Home Insert Page Layout Formulas Data Review View Help X Cut Arial 12 A A al Wrap Text LE Copy aste BIUVY MV A Merge & Cen Format Painter Clipboard Font Alignment X Y fx A B C D E F G Excess cash 2,500,000 Annual EBIT 1,300,000 Corporate tax rate 21% Unlevered cost of equity 20% Interest income tax rate 25% Bankruptcy costs $ 400,000 Output Area: a. Aftertax income Vu b. VL C. Vu VL The bankruptcy costs (would or would not?) affect the value of the unlevered firm since SubmissionDetails #1 #2 #3 #5 #6 #7 #8 #10 + eady Ex Accessibility: Investigate Type here to search OQuestlons and Prob X C prodreaderui.prod.n'|heduc ioncom * K ,- Apps ' Email . YnuTube ~ Maps :5 News '1'] Translate - (BEthowToMaks... Flnancet . mere Ratesand... t FNANSMIFIrmEv... E Readinglist ,0 Aa e rate is 25 percent, the personal tax rate on interest income is 20 percent, and there are no costs of nancial distress, by how much will the value of the rm change if it issues $1 million in debt and uses the proceeds to repurchase equity? d. Consider another all-equity rm that does not pay taxes due to large tax loss carryforwards from previous years. The personal tax rate on interest income is 20 percent and there are no costs of nancial distress. What would be the change in the value of this rm from adding $1 of perpetual debt rather than $1 of equity? 10. Personal Taxes, Bankruptcy Costs, and Firm Value Overnight Publishing Company (OPC) has $2.5 million in excess cash. 22 The rm plans to use this cash either to retire all of its outstanding debt or to repurchase equity. The rm's debt is held by one institution that is willing to sell it back to OPC for $2.5 million. The institution will not charge OPC any transaction costs. Once OPC becomes an all-equity rm, it will remain unlevered forever. If OPC does not retire the debt, the company will use the $2.5 million in cash to buy back some of its stock on the open market. Repurchasing stock also has no transaction costs. The company will generate $1.3 million of annual earnings before interest and taxes in perpetuity regardless of its capital structure. The rm immediately pays out all earnings as dividends at the end of each year. OPC is subject to a corporate tax rate of 21 percent and the required rate of return on the rm's unlevered equity is 20 percent. The personal tax rate on interest income is 25 percent and there are no taxes on equity distributions. Assume there are no bankruptcy costs. a. Mat is the value of OPC if it chooses to retire all of its debt and become an unlevered rm? h. Wat is the value of UPC if it decides to repurchase stock instead of retiring its debt? (Him: Use the equation for the value of a levered rm with personal tax on interest income from the previous problem.) e. Assume that expected bankruptcy costs have a present Value of $400,000. How does this inuence OPC's decision? El" lMG_[19'35.Jq |:|' 1MG_0996.' L |:i IMG_0997.i |:i IMG_uags'x EI' 1AM3_[19'39.3q |:|' |MG_1UD'1.'L 15 . JPJ .Ps JF J 15 . JP] s 56:1: Partly sunny