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1) Find out the main reasons why the multinational corporation might come to a decision to borrow in the country like Brazil, where interest rates are high, rather than in the country like Switzerland, where interest rates are low. Give support for your justification.

2) Market value of United Frypan Company is given below:

VDO = $40.00 (Value of Debt)
VEO = $120.00 (Value of Equity)

Tax rate is 40% and interest is tax deductible. Company is perpetual steady state company. At present the debt is yielding 8%.

a) How much of firm's value is accounted for by debt generated subsidy?

b) How much better off will UF's shareholders be if firm borrows $20 more and utilizes it to repurchase stock? Interest rate will be 10% with this higher debt level.

c) Now assume that government passes the law which will phase out deductibility of interest for tax purposes after a period of 5 years. What will the new value of the firm be, all other things remaining equal.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M914382

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