This paper circulates around the core theme of Are Swank’s stockholders better off after the debt issue? Why or why not? If there were no corporate taxes on income (and consequently interest expense was not deducted from the firm’s taxable income), how would this affect your responses to parts a t together with its essential aspects. It has been reviewed and purchased by the majority of students thus, this paper is rated 4.8 out of 5 points by the students. In addition to this, the price of this paper commences from £ 99. To get this paper written from the scratch, order this assignment now. 100% confidential, 100% plagiarism-free.
Case 5. (Computing
interest tax savings)
Presently, H. Swank, Inc. does not use
any financial leverage and has total financing equal to $1 million. It is
considering refinancing and issuing $500,000 of debt that pays 5 percent
interest and using that money to buy back half the firm’s common stock. Assume
that the debt has a 30-year maturity such that Swank will have no principal
payments for 30 years. Swank currently pays all of its net income to common
shareholders in the form of cash dividends and intends to continue to do this
in the future. The corporate tax rate on the firm’s earnings is
35 percent.
Swank’s current income
statement (before the debt issue) is as follows:
|
Earnings
before interest and taxes (EBIT)
|
$100,000
|
|
Less:
Interest expense
|
0
|
|
Equals: Earnings
before tax
|
$100,000
|
|
Less:
Taxes
|
(35,000)
|
|
Equals:
Net income
|
$
65,000
|
a. If Swank issues the
debt and uses it to buy back common stock, how much money can the firm
distribute to its stockholders and bondholders next year if the firm’s EBIT
remains equal to $100,000?
FIN325/ Corporate
Finance, Assignment #2
b. What are Swank’s
interest tax savings from the issuance of the debt?
c.Are Swank’s
stockholders better off after the debt issue? Why or why not?
d. If there were no
corporate taxes on income (and consequently interest expense was not deducted
from the firm’s taxable income), how would this affect your responses to parts
a through c?
