IBM currently has $108B in debt and $100B worth of cash. Assuming that IBM plans to keep its level of debt constant forever, and that its marginal tax rate is 25%, what would be the impact on the tax...

1. 
   

   IBM currently has $108B in debt and $100B worth of cash. Assuming that IBM plans to keep its level of debt constant forever, and that its marginal tax rate is 25%, what would be the impact on the tax shield of returning $20B in cash to investors in a repurchase program?

   
   


2. 
   

   Suppose that the only market imperfection comes from the presence of corporate taxes, and that the corporate tax rate is 25%. Currently, The Company has beta of equity of 0.6 and a debt-to-value ratio of 45%. Its current credit rating is B, which corresponds to a debt beta of 0.25. The CFO plans to reduce its debt-to-value ratio to 20%, which should improve its credit rating. The CFO expects that after the leverage reduction, its credit rating will be BBB, which corresponds to a debt beta of 0.1. If the risk free rate is 5%, and the market risk premium is 8%, what is the expected return on equity before and after the change in leverage?

   
   


3. 
   

   Seashore Salt Co. has surplus cash. Its CFO decides to pay back $4 per share to investors by initiating a regular dividend of $4 per year. The stock price jumps to 90$ when the payout is announced. Why does the stock price increase?

   
   


4. 
   

   TKD Corporation has assets with a market value of $100 million, $10 million of which are cash. TKD has debt of $40 million, and 10 million shares outstanding. Suppose that TKD distributes $10 million as a dividend. Assuming perfect capital markets, what will TKD new market debt-equity ratio be after the dividend is paid?

   
   

Questions 1. IBM currently has $108B in debt and $100B worth of cash. Assuming that IBM plans to keep its level of debt constant forever, and that its marginal tax rate is 25%, what would be the impact on the tax shield of returning $20B in cash to investors in a repurchase program? 2. Suppose that the only market imperfection comes from the presence of corporate taxes, and that the corporate tax rate is 25%. Currently, The Company has beta of equity of 0.6 and a debt-to-value ratio of 45%. Its current credit rating is B, which corresponds to a debt beta of 0.25. The CFO plans to reduce its debt-to-value ratio to 20%, which should improve its credit rating. The CFO expects that after the leverage reduction, its credit rating will be BBB, which corresponds to a debt beta of 0.1. If the risk free rate is 5%, and the market risk premium is 8%, what is the expected return on equity before and after the change in leverage? 3. Seashore Salt Co. has surplus cash. Its CFO decides to pay back $4 per share to investors by initiating a regular dividend of $4 per year. The stock price jumps to 90$ when the payout is announced. Why does the stock price increase? 4. TKD Corporation has assets with a market value of $100 million, $10 million of which are cash. TKD has debt of $40 million, and 10 million shares outstanding. Suppose that TKD distributes $10 million as a dividend. Assuming perfect capital markets, what will TKD new market debt-equity ratio be after the dividend is paid?