Sunshine Travel has earnings of £18 million of which £6 million is available for either investment orshareholders. Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or distribute as a dividend. Sunshine Travel faces a corporate tax rate of 25 per cent. As managers of the firm, you know that the shareholder base is diverse. You have pension funds that are tax-exempt, corporate investors with a marginal tax rate of 25 per cent, and retail investors who have a 45 per cent marginal tax rate. Required: a) Consider the firm's investment decision from the perspective of pension funds, corporate investors, and retail investors. Discuss which decision is best for each group.
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- Sunshine Travel has earnings of £18 million of which £6 million is available for either investment or shareholders. Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or distribute as a dividend. Sunshine Travel faces a corporate tax rate of 25 per cent. As managers of the firm, you know that the shareholder base is diverse. You have pension funds that are tax-exempt, corporate investors with a marginal tax rate of 25 per cent, and retail investors who have a 45 per cent marginal tax rate. Required: a) Consider the firm's investment decision from the perspective of pension funds, corporate investors, and retail investors. Discuss which decision is best for each group. b) Sunshine travel has decided to distribute the £6 million to shareholders. Advise Sunshine Travel the choice between paying cash dividends and repurchasing shares.Sunshine Travel has earnings of £18 million of which £6 million is available for either investment or shareholders. Sunshine Travel has two options: a) it can invest the £6 million in Treasury bonds at 5 per cent or b)distribute as a dividend. Sunshine Travel faces a corporate tax rate of 25 per cent. As managers of the firm, you know that the shareholder base is diverse. You have pension funds that are tax-exempt, corporate investors with a marginal tax rate of 25 per cent, and retail investors who have a 45 per cent marginal tax rate. Required:b) Sunshine travel has decided to distribute the £6 million to shareholders. Advise Sunshine Travel the choice between paying cash dividends and repurchasing shares.Dollar General (DG) is choosing between financing itself with only equity or with debt and equity. Regardless of how it finances itself, the EBIT for DG will be $545.63 million. If DG does use debt, the interest expense will be $57.85 million. If DG‘s corporate tax rate is 0.30, how much will DG pay (in millions) in total to ALL investors if it uses both debt and equity? Instruction: Type ONLY your numerical answer in the unit of millions
- Guam Motors is presently an all equity firm. It needs to raise $2.5m in additional funds. After raising its funds, it expects perpetual EBIT to be $600,000. The firm's unlevered cost of equity is 12% and its before tax cost of debt is 8%. 1) If there are no corporate taxes, under M-M theory what is the value of Guam Motors if it employs common stock to raise the needed funds? 2)If there are no corporate taxes and Guam Motors employs debt to raise 50% of the firm value, what is the cost of equity, the weighted average cost of capital and the value of the firm? 3) If there are no corporate taxes and M-M theory holds, will investors prefer levered firm to the unlevered firm? Why? 4)Will the presence of corporate taxes increase or decrease the firm value? Why? 5)Assume that corporate tax is 25%. What is the all equity value of Guam Motors? 6)If the corporate tax is 25% and Guam Motors employees same amount of debt as in 2) to raise part of the firm value, what is the cost of equity,the…Particulate plc is an all-equity-financed business with a market value of £35 million and a cost of capital (after tax) of 20 per cent p.a. The business intends to purchase and cancel £8 million of equity finance using the cash raised from issuing 10 per cent irredeemable loan notes. The rate of corporation tax is 30 per cent. Assuming that the assumptions of Modigliani and Miller (in a world with taxes) are correct, how will the capital restructuring affect: (a) The market value of Particulate plc; (b) Its cost of equity; and (c) Its weighted average cost of capital?At this point, you may be confused why calling part of your in- vestment debt or equity makes a difference. Let’s walk through an example and compute your post-tax returns. Suppose $2 million of your investment is structured as debt and the remaining $8 million is equity. What happens each year after the company is set up? Well, using the $4 million EBIT, the company will first pay $2 million 50% = $1 million interest to you (as a debt investor). Then, on the remaining $4 $1 = $3 million of EBIT, the company pays corporate taxes of $3 20% = $0.6 million and is left with $2.4 million, which will be paid out to you (the equity holder) as dividend. Income Statement EBIT 4 -Interest expense 1 -Corporate taxes .6 = Net income of 2.4 million Therefore, the total returns to you (as an investor) is $1 million in interest and $2.4 million in dividends, which is a total of $3.4 million.4 Uncle Sam collected $0.6 million. The company will go bankrupt if its EBIT is strictly less than interest…
- You are a personal investor investigating the possibility of investing in Pulleys and Plugs Ltd. Which is a taxation category 2 company. You have a required rate of return of 10% per annum and, as such, need to identify the rate of return demanded by the investors in Pulleys and Plugs to compare to your required rate. You have identified the following characteristics of Pulleys and Plugs. The latest balance sheet for the Pulleys and Plugs shows: Long Term Debt Book Value ($) Bonds: Issued at par: $100 6,000,000 Annual coupon of 14% 8 years to maturity Equity Preference Shares: 1,000,000 100,000 shares outstanding Ordinary Shares: 5,000,000 5,000,000 shares outstanding The company's bank has advised that the interest rate on any new debt finance provided for new projects would be 9% p.a. The company's preference shares currently sell for $13.56 each and pay an annual dividend of $2.20. The company's existing ordinary shares currently sell for $0.87 each and pay a dividend per share of…Blue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .45, but the industry target debt- equity ratio is .50. The industry average beta is 1.10. The market risk premium is 6.9 percent and the risk-free rate is 4.5 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 23 percent. The project requires an initial outlay of $825,000 and is expected to result in a $101,000 cash inflow at the end of the first year. The project will be financed at the company's target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 5 percent until the end of the fifth year and remain constant forever thereafter. Calculate the NPV of the project. (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.) NPVA firm is financed with a mix of risk-free debt (currently valued at £800,000) and equity (which has a current market value of £1,200,000). The risk-free rate is 8%, the firm's cost of equity capital is 14%. What is the firm's weighted average cost of capital (to the nearest 0.01%) (i) with no taxation and (ii) if the firm's marginal tax rate is 40% and debt interest payments are tax deductible.? Select an answer and submit. For keyboard navigation, use the up/down arrok keys to select an answer. a (i) 11.60% and (ii) 10.32% b (i) 10.40% and (ii) 8.48% (i) 11.60% and (ii) 8.48% d. None of the above. (1) 10.40% and (11) 10.32% Unanswered Save
- You have been tasked with the responsibility of calculating the WACC for Meeks Investments Limited and Hall Developments Limited. The risk free rateis currently 4% and the market risk premium is 6.5%. The details for both companies are presented in the table below. the tax rate is 25%. MeeksInvestments Limited Hall Developments Limited Value of Common Equity $1,500,000 $3,000,000 Beta 2.18 1.52 Value of preferred Equity $1,000,000 $500,000 Preffered Dividends 4.50 $7.60 Priceof Preffered Stock $60 $80 Price of Bonds $970 $1,160 Coupon Rate (Paid semi- annually) 8% 11% par value of bonds $1,000 $1,000 years to Maturity 8 12 Value of Debt $2,500,000 $1,500,000 Use the information in the table above to calculate the WACC for both companiesBlue Angel, Inc., a private firm in the holiday gift industry, is considering a new project. The company currently has a target debt-equity ratio of .45, but the industry target debt-equity ratio is .40. The industry average beta is 1.05. The market risk premium is 6.5 percent and the risk-free rate is 4.1 percent. Assume all companies in this industry can issue debt at the risk-free rate. The corporate tax rate is 24 percent. The project requires an initial outlay of $805,000 and is expected to result in a $97,000 cash inflow at the end of the first year. The project will be financed at the company’s target debt-equity ratio. Annual cash flows from the project will grow at a constant rate of 4 percent until the end of the fifth year and remain constant forever thereafter. Calculate the NPV of the project.You have been tasked with the responsibility of calculating the WACC for Meeks Investments Limited and Hall Developments Limited. The risk-free rate is currently 4% and the market risk premium is 6.5%. The details for both companies are presented in the table below. The tax rate is 25%. Meeks Investments Limited Hall Developments Limited Value of Common Equity $1,500,000 $3,000,000 Beta 2.18 1.52 Value of Preferred Equity $1,000,000 $500,000 Preferred Dividends $4.50 $7.60 Price of Preferred Stock $60 $80 Price of Bonds $970 $1,160 Coupon Rate (Paid semi-annually) 8% 11% Par Value of Bonds $1,000 $1,000 Years to Maturity 8 12 Value of Debt $2,500,000 $1,500,000 Use the information in the table above to calculate the WACC for both companies.