The Goodsmith Charitable foundation, which is tax-exempt, issued debt last year at 8 percent to help finance a new playground facility in Los Angeles. This year the cost of debt is 20% higher; that is, firms that paid 10 percent for debt last year will be paying 12 percent this year. a) if the goodsmith foundation borrowed money this year, what would the after tax cost of debt be, based on its cost last year and the 20% increase? b) if the receipts of the foundation were found to be taxable by the IRS (at a rate of 35% because of the involvement in political activities), what would the aftertax cost of the debt be?
The Goodsmith Charitable foundation, which is tax-exempt, issued debt last year at 8 percent to help finance a new playground facility in Los Angeles. This year the cost of debt is 20% higher; that is, firms that paid 10 percent for debt last year will be paying 12 percent this year. a) if the goodsmith foundation borrowed money this year, what would the after tax cost of debt be, based on its cost last year and the 20% increase? b) if the receipts of the foundation were found to be taxable by the IRS (at a rate of 35% because of the involvement in political activities), what would the aftertax cost of the debt be?
Related questions
Assume you have just been hired as a business manager ofPizzaPalace, a regional pizza restaurant chain. The companyâs EBITwas $50 million last year and is not expected to grow. The firm iscurrently financed with all equity, and it has 10 million sharesoutstanding. When you took your corporate finance course, yourinstructor stated that most firmsâ owners would be financiallybetter off if the firms used some debt. When you suggested this toyour new boss, he encouraged you to pursue the idea. As a firststep, assume that you obtained from the firmâs investment bankerthe following estimated costs of debt for the firm at differentcapital structures:
Percent Financed with Debt, | |
0% | â |
20 | 8.0% |
30 | 8.5 |
40 | 10.0 |
50 | 12.0 |
If the company were to recapitalize, then debt would be issuedand the funds received would be used to repurchase stock.PizzaPalace is in the 40% state-plus-federal corporate tax bracket,its beta is 1.0, the risk-free rate is 6%, and the market riskpremium is 6%.
1. Using the free cash flow valuation model, show the onlyavenues by which capital structure can affect value.
Using complete sentences and academic vocabulary, please answerquestion. Please don't copy from other sources. Thank you
Assume you have just been hired as a business manager ofPizzaPalace, a regional pizza restaurant chain. The companyâs EBITwas $50 million last year and is not expected to grow. The firm iscurrently financed with all equity, and it has 10 million sharesoutstanding. When you took your corporate finance course, yourinstructor stated that most firmsâ owners would be financiallybetter off if the firms used some debt. When you suggested this toyour new boss, he encouraged you to pursue the idea. As a firststep, assume that you obtained from the firmâs investment bankerthe following estimated costs of debt for the firm at differentcapital structures:
Percent Financed with Debt, | |
0% | â |
20 | 8.0% |
30 | 8.5 |
40 | 10.0 |
50 | 12.0 |
If the company were to recapitalize, then debt would be issuedand the funds received would be used to repurchase stock.PizzaPalace is in the 40% state-plus-federal corporate tax bracket,its beta is 1.0, the risk-free rate is 6%, and the market riskpremium is 6%. 1. a. What is business risk? What factors influencea firmâs business risk? b. What is operating leverage, and how doesit affect a firmâs business risk? Show the operating break-evenpoint if a company has fixed costs of $200, a sales price of $15,and variable costs of $10. Using complete sentences and academicvocabulary, please answer question. Please don't copy from othersources. Thank you
