Full Name and Group (legibly): Last Name, First Name Middle Name, Group

Corporate Finance
Homework 5, Due 04 March, Monday (in class)
Total 10 points. Please, solve all problems.

Problem 1
An Open LLC has EBIT of $455 million. In addition, Open LLC has interest expenses of $155 million and a corporate tax
rate of 40%.
a.(0.5 Points) What is Open’s net income?
b.(0.5 Points) What is the total of Open’s net income and interest payments?
c.(0.5 Points) If Open had no interest expenses, what would its net income be? How does it compare to your answer in
part b?
d.(0.5 Points) What is the amount of Open’s interest tax shield? What would be market value of assets if the firm had no
debt and instead were entirely financed by equity.

Problem 2
Veam Inc has assets with a market value of $ 600 million, $ 40 million of which are cash. It has debt of $ 250 million, and
20 million shares outstanding. Assume perfect capital markets.
a. (0.5 Points) What is its current stock price?
b. (0.5 Points) If Veam Inc distributes $ 40 million as a dividend, what will its share price be after the dividend is paid?
c. (0.5 Points) If instead, Veam Inc distributes $ 40 million as a share repurchase what will its share price be once the shares
are repurchased? Explain in details why.

Problem 3
Indust Inc expects to have net income $22.15 million and free cash flow of $24.55 million and market value of assets $400
mln. Indust’s marginal corporate tax rate is 40%.
a.(0.4 Points) If Indust increases leverage so that its interest expense rises by $2 million, how will its net income change?
b. (0.4 Points) For the same increase in interest expense, how will free cash flow change (assume no other changes)?
c. (0.2 Points) What is the increase in the market value of assets?

Note:
Free Cash Flow= Net Income + Depreciation - Capital Expenditure – Increase in NWC
NWC =Net Working Capital = Current Assets – Current Liability

Free Cash Flow = (Revenues - Costs - Depreciation) * (1 – T) + Depreciation - CapEx – dNWC

Problem 4
(0.5 Points) The firm OLY Inc currently has $120 million in debt outstanding with a 15% interest rate. The terms of the loan
require the firm to repay $30 million of the balance each year. Suppose that the marginal corporate tax rate is 35%, and that
the interest tax shields have the same risk as the loan. What is the present value of the interest tax shields from this debt?

Problem 5
Go Industries has just issued $10 million in debt (at par). The firm will pay interest only on this debt. Go’s marginal tax rate
is expected to be 35% for the foreseeable future.
a. (0.5 Points) Suppose Go pays interest of 6% per year on its debt. What is its annual interest tax shield?
b. (0.5 Points) What is the present value of the interest tax shield, assuming its risk is the same as the loan?
c. (0.5 Points) Suppose instead that the interest rate on the debt is 5%. What is the present value of the interest tax shield in
this case?
 Problem 6
Intelzug Inc. has no debt, and maintains a policy of holding $10 million in excess cash reserves, invested in risk-free
Treasury securities at the rate of R_f =5%/
a) (0.5 Point) If Intelzug pays a corporate tax rate of 35%, what is the cost of permanently maintaining this $10 million
reserve? (Hint : What is the present value of the additional taxes that Intelzug will pay? Look at the Interest Tax Shield)
b)(0.5 Point) Draw the Balance Sheet that reduces taxes for Intelzug .

Problem 7
Suppose an H1200 supercomputer has a cost of $200,000 and will have a residual market value of $60,000 in five years.
The risk-free interest rate is 5% APR with monthly compounding. Write down and explain the formulas which you use to
compute the answers.
a. (0.5 Points) What is the risk-free monthly lease rate for a five-year lease in a perfect market?
b.(0.5 Points) What would be the monthly payment for a five-year $200,000 risk-free loan to purchase the
H1200?

Problem 8
Consider a five-year lease for a $400,000 bottling machine, with a residual market value of $150,000 at the end of the five
years If the risk-free interest rate is 6% APR with monthly compounding, compute the monthly lease payment (in total
5*12=60) in a perfect market for the following leases. Write down and explain the formulas which you use to compute
the answers.
a.(0.5 Points) A fair market value lease
b.(0.5 Points) A $1.00 out lease
c.(0.5 Points) A fixed price lease with an $80,000 final price