Ask Question, Ask an Expert


Ask Accounting Basics Expert

a) Referring to Table bellow, find out the market value of firm L (firm a corporate income tax) if the equity amount in its capital structure decreases to $3000 and the debt amount increases to $3000.

b) For firm L (with equity = $3000 and equity and debt = $3000), find out (i) the income available to the stockholders and (ii) the cost of equity.

Table Capital Structure with a Corporate Income Tax:
Financial Data on Firms U and L
Firm U Firm L
Net Operating income (EBIT) $1000 $1000
Less: Interest payments to debt holders, I - 100
Income before taxes $1000 $900
Less: Corporate taxes (T=40%) 400 $360
Income available to stockholder(dividends), D $600 $540
Total income available to security holders (I+D) $600 $640
Required rate of return on debt, Kd - 5%
Market value of debt, (B=I/Kd) - $2000
Required rate of return on equity, Ke 10% 11.25%
Market Value of equity, (E=D/Ke) $6000 $4800
Market Value of Firm, (E+B) $6000 $6800


Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M946732

Have any Question? 

Related Questions in Accounting Basics

Practice questionsthe following transactions have taken

Practice questions: The following transactions have taken place in a business. Enter the name of the balance sheet item(s) affected under the appropriate column and indicate whether there has been an increase or decrease ...

Assume the demand for a companys drug wozac during the

Assume the demand for a company's drug Wozac during the current year is 50,000, and assume demand will grow at 5% a year. If the company builds a plant that can produce x units of Wozac per year, it will cost $16x. Each ...

Problem-flowton enjoys a steady demand for stainless steel

Problem- Flowton enjoys a steady demand for stainless steel infiltrators used in a number of chemical processes. Revenues from the infiltrator division are $50 million a year and production costs are $47.50 million. Howe ...

Valuation of accounts receivablesbulldiscuss the primary

Valuation of Accounts Receivables • Discuss the primary advantages and disadvantages of applying the direct write-off and the allowance method of writing off accounts. Even though the direct write-off method is not accep ...

Practice questionsdescribe the main features of a

Practice questions: Describe the main features of a partnership and explain their importance to anyone considering starting such a business.

1 tonys pizza has total sales of 786611 and costs of 524268

1. Tony's Pizza has total sales of $786,611 and costs of $524,268. Depreciation is $38,470 and the tax rate is 31 percent. The firm does not have any interest expense. What is the operating cash flow? 2. A company purcha ...

Q1- chart of accountsinnerscape interiors is owned and

Q1- Chart of accounts Innerscape Interiors is owned and operated by Jackie Vargo, an interior decorator. In the ledger of Innerscape Interiors, the first digit of the account number indicates its major account classifica ...

Problem - journalize and post the following entries you

Problem - Journalize and post the following entries. You will need to create additional T accounts as needed. Our sales terms are always 3/15 n45 for sales made on account unless stated otherwise. See if you can trace th ...

Assignment -1analysis assignmentinterpretation and

Assignment -1: Analysis Assignment Interpretation and comparison between the two companies' ratios (reading Chapter 15 will help you prepare the commentary). The comparison of the ratios is an important part of the proje ...

Assessment item - review of current accounting issuestaskin

Assessment item - Review of Current Accounting Issues Task In your accounting career you will be required to analyse current accounting issues and communicate your theoretical understanding to your professional colleague ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

A cola-dispensing machine is set to dispense 9 ounces of

A cola-dispensing machine is set to dispense 9 ounces of cola per cup, with a standard deviation of 1.0 ounce. The manuf

What is marketingbullwhat is marketing think back to your

What is Marketing? • "What is marketing"? Think back to your impressions before you started this class versus how you

Question -your client david smith runs a small it

QUESTION - Your client, David Smith runs a small IT consulting business specialising in computer software and techno

Inspection of a random sample of 22 aircraft showed that 15

Inspection of a random sample of 22 aircraft showed that 15 needed repairs to fix a wiring problem that might compromise

Effective hrmquestionhow can an effective hrm system help

Effective HRM Question How can an effective HRM system help facilitate the achievement of an organization's strate