Question

SuperOil has a debt-to-value ratio of 15%. Its revenue is 100,000 per year and cost is 70,000 per year forever. Its cost of debt is 7% and its cost of equity is 25%. It has 10,000 shares outstanding. Corporate tax rate is 35%. (a) What is the firm’s value? (3.5pt) (b) What is its stock price? (3.5pt) (c) SuperBuyout is a leveraged buyout firm. It believes that SuperOil’s leverage is too low. It thinks that SuperOil’s firm value can increase with higher debt-to-value ratio and believes SuperOil’s optimal debt-to-value ratio is 25%. SuperOil’s cost of debt at this 25% debt-to-value ratio is 9%. SuperBuyout is considering buying all of SuperOil’s shares and increase SuperOil’s leverage to the optimal 25% level. Proceed from debt issuance will be given out to equityholderes as special dividend. What is the maximum premium SuperBuyout is willing to pay for SuperOil’s shares? (6pt).

Answer #1

Company U has no debt outstanding currently and the cost of
equity is 12%. Its EBIT is expected to be $ 201896 every year
forever. The tax rate is 35%. Calculate the value of the firm.
Company U has no debt outstanding currently and the cost of equity
is 12%. Its EBIT is expected to be $ 201896 every year forever. The
tax rate is 35%.Calculate the value of the firm if it borrows $
453493 and uses the proceeds...

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a. This year, PKGR is expected to have...

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A firm’s debt has a par value of $1,000,000. The market value of
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value of $275 million outstanding. The debt consists of 9 percent
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Abbe Technology (AT) has no debt and its assets cost of capital
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If AT borrowed to reach a debt-to-equity ratio of 1.5, the cost
of equity would be 13.75%. What would AT's cost of debt be after
this (hypothetical) increase in leverage?
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The Rivoli Company has no debt outstanding, and its financial
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book value) $3,000,000 EBIT $500,000 Cost of equity, rs 10% Stock
price, Po $15 Shares outstanding, no 200,000 Tax rate, T
(federal-plus-state) 40% The firm is considering selling bonds and
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Market value of debt: $50
Market value of equity: $50
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PROBLEM 4-2: Debt to Capital Ratio
Kaye’s Kitchenware has a market/book ratio equal to 1. Its stock
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The firm’s total capital (TIC) is $110 million, and it finances
with only debt and common equity. What is its debt-to-capital
ratio?
Hint:
Since the Market to Book (M/B) is 1 then Market Value of
Equity (MVE) = Book Value of
Equity (BVE). Think MVA formula.
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