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You work for the capital division of a company. Your team is responsible with raising capital for various projects and with analyzing the effect of capital structure decisions. Some of the tasks that your team is currently working on are outlined below. 1. Currently, your firm has $12,000,000 of debt outstanding that is selling at par and has a coupon rate of 8%. The tax rate is 24%. How much of a tax shield does this debt provide every year? What is the present value of the tax shield, assuming that your company maintains this level of debt in perpetuity? 2. Your firm has a debt-equity ratio of .60. Your cost of equity is 11% and your cost of debt is 4%. The CEO of the copmanyl wants to increase the company's growth and is therefore considering increasing the level of debt to reach a target capital structure with a 50/50 mix of debt and equity. What will happen to your firm's cost of equity if this decision goes through? You are facing uncertainty about what the tax rates will be for the near future, so your boss would like you to look at this in a situation without taxes first, and then consider a situation where the tax rate is 24%. Briefly discuss the effect of taxes. 3. The flow-to-equity approach has been used by the firm to value their capital budgeting projects. The total investment cost at time 0 is $640,000. The company uses the flow-to- equity approach because they maintain a target debt to equity value of 0.5 and they plan to finance this project using the same debt to equity ratio. What is the relevant initial investment cost to use in determining the value of the project? 4. Your firm is considering financing a project that costs $1,000,000 by raising $500,000 in equity and $500,000 in debt with a 7% interest rate for 8 years. The NPV of the unlevered project would be -$50,000. Assume that the tax rate for your firm stays at 24%. What is the value of the tax subsidy to debt in this case? Is this value large enough to tal the levered project? Assumptions (Inputs): Output area: $ Task 1: Tax Shield Analysis Current amount of debt Coupon Rate Tax Rate 12,000,000.00 8% 24% Yearly Tax Shield PV of Tax Shield Task 2: Capital Structure Analysis Curent D/E Ratio Current Cost of Equity Current Cost of Debt Target weight of equity No Tax Rate New cost of equity 0.6 11% 4% 50% 24% Tax Rate New Cost of Equity Briefly discuss Effect of Taxes: Task 3: FTE Approach to Capital Budgeting Cost at time 0 $ 640,000.00 Target D/E financing 0.5 Initial Investment considered for FTE Tax Subsity to Debt Task 4: APV Approach - Tax Subsidies to Debt Project Cost $ 1,000,000.00 Amount of Equity Financing $ 500,000.00 Amount of Debt Financing $ 500,000.00 Debt Interest Rate 7% Length of Debt (years) 6 NPV of unlevered project $ (50,000.00) Tax Rate 24% NPV of Levered Project Discussion: Is the tax subsidy large enough to take the project