Perpetuum Mobile Inc. is an all-equity firm that generates $6m in annual after-tax cash flows that...

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Perpetuum Mobile Inc. is an all-equity firm that generates $6m in annual after-tax cash flows that are expected to remain constant forever. It's cost of capital is currently 11%. The firm is planning to borrow $15M and use the proceeds to buy back shares. The cost of debt is 8%. The debt will mature in 10 years after which the firm is expected to maintain zero-leverage capital structure. What is the new value of the firm if the tax rate is 30%? 2. "To finance its new project, Old Habits Inc. needs $5M that will be raised by issuing 6-year bonds. The interest rate on the bonds is 7% and the bonds will be issued at par. The flotation costs will be covered from the proceeds of the bond issue and are 2% of the gross proceeds. Find the NPV of flotation costs if the tax rate is 25%." Perpetuum Mobile Inc. is an all-equity firm that generates $6m in annual after-tax cash flows that are expected to remain constant forever. It's cost of capital is currently 11%. The firm is planning to borrow $15M and use the proceeds to buy back shares. The cost of debt is 8%. The debt will mature in 10 years after which the firm is expected to maintain zero-leverage capital structure. What is the new value of the firm if the tax rate is 30%? 2. "To finance its new project, Old Habits Inc. needs $5M that will be raised by issuing 6-year bonds. The interest rate on the bonds is 7% and the bonds will be issued at par. The flotation costs will be covered from the proceeds of the bond issue and are 2% of the gross proceeds. Find the NPV of flotation costs if the tax rate is 25%."

Answer rating: 100% (QA)

1 To calculate the new value of the firm after the share buyback and borrowing we need to calculate the present value of the aftertax cash flows and t... View the full answer