RosenBall, ASA expects a cash-equivalent EBIT of 200 without any growth in the foreseeable future. The firm’s overall cost of capital (the required rate of return on assets) is 10%, the applicable tax-rate is 25%, and there are 200 shares outstanding. RosenBall’s board of directors are currently looking into the possibility of refinancing the firm by borrowing 900 at an interest rate of 5% per year. The loan is serviced by paying the annual interest, only.
1. With corporate taxes, only, what is RosenBall’s market value per share when the actual borrowing has taken place? State your answer to two decimal points.
2. If Rosenball’s lenders (bond investors) pay tax at a rate of 25% at the margin, while shareholders are tax-exempt, what is the contribution to firm value from leverage (debt)? State your answer as a whole number without any decimal points.
3. If Rosenball’s lenders (bond investors) and shareholders pay tax at marginal rates of 25% and 10%, respectively, what is now the contribution to firm value from leverage (debt)? State your answer as a whole number without any decimal points.