Question

An all equity firm is expected to generate perpetual EBIT of $50 million per year forever. The corporate tax rate is 0% in a fantasy no tax world. The firm has an unlevered (asset or EV) Beta of 1.0. The risk-free rate is 5% and the market risk premium is 6%. The number of outstanding shares is 10 million.

**2. The firm
decides to replace part of the equity financing with perpetual
debt. The firm issues $100 million of permanent debt at the
riskless interest rate of 5%, and repurchases $100 million of
equity.**

**
A. Find the new value of the levered firm.**

**
B. Find the new number of shares outstanding, and the new share
price.**

Answer #1

1. CAPM return = Risk Free + Beta * Market Risk Premium

CAPM return = 5% + 1.0* 6%

**CAPM return = 11.00%**

2. Value of Unlevered Company = EBIT * (1 - Tax) / CAPM return = $50 M * 1 / 11.00% = $909.09 Million

**A. Value of Levered Company = Value of Unlevered Company
= $909.09 Million**

B. New Share Price = (Value of Company - Value of Debt) / Shares O/s

New Share Price = ($909.09 M - $100 M) / 10 M

**New Share Price = $80.91**

B-1. Number of Shares O/s after repurchase = Current Shares - Share Repurchased

Number of Shares O/s = 10 M - (100 M / 80.91)

**Number of Shares O/s = 8.76 Million Shares**

An all equity firm is expected to generate perpetual EBIT of
$100 million per year forever. The corporate tax rate is 35%. The
firm has an unlevered (asset or EV) Beta of 0.8. The risk-free rate
is 4% and the market risk premium is 6%. The number of outstanding
shares is 10 million. The firm decides to replace part of the
equity financing with perpetual debt.
2) The firm will issue $100 million of permanent debt at the
riskless interest...

An all equity firm is expected to generate perpetual EBIT of
$100 million per year forever. The corporate tax rate is 35%. The
firm has an unlevered (asset or EV) Beta of 0.8. The risk-free rate
is 4% and the market risk premium is 6%. The number of outstanding
shares is 10 million.
The firm decides to replace part of the equity financing with
perpetual debt. The firm will issue $100 million of permanent debt
at the riskless interest rate...

Find the value of levered equity for this firm.
Assume the firm has perpetual cash flows. Use Miller &
Modigiiani's Proposition II concerning the
cost of equity.
You have the following information about the firm:
EBIT = $100 million
Tax rate - 35%
Debt = $150 million
Cost of debt = 8%
Unlevered cost of capital = 12%

Assume a Modigliani and Miller world. All cash flows are
perpetuities. Parts A, B, and C below are 6, 6, and 8
points respectively.
Rent-a-Raptor is 100% equity financed. The firm is expected to
have perpetual EBIT of $70 million per year. The unlevered equity
or asset Beta is 1.0. The riskless rate is 4%, and the market risk
premium is 6%. There are 10 million shares of common stock
outstanding. The corporate tax rate is 40%.
A. Calculate the...

Fortune Enterprises is an all-equity firm that is considering
issuing $13.5 million of perpetual debt. The interest rate is 10%.
The firm will use the proceeds of the bond sale to repurchase
equity. Fortune distributes all earnings available to stockholders
immediately as dividends. The firm will generate $3 million of
earnings before interest and taxes (EBIT) every year into
perpetuity. Fortune is subject to a corporate tax rate of 40%.
Suppose the personal tax rate on interest income is 55%,...

Ajax has a tax rate of 30% and an EBIT of $50 million. The
unlevered cost of capital is 14%.
a) What is the value of the unlevered firm? What is the cost of
equity for the unlevered firm? What is the WACC of the unlevered
firm?
b) Now suppose that Ajax issues $90 million in debt to buy back
stock. The cost of debt is 8%. For the levered firm, find the value
of the levered firm, the cost...

Change Corporation expects an EBIT of $49,000 every year
forever. The company current has no debt, and its cost of equity is
13 percent. The corporate tax rate is 24 percent. What is the
current value of the company? Suppose the company can borrow at 10
percent. What will the value of the firm be if the company takes on
debt equal to 60 percent of its unlevered value? Suppose the
company can borrow at 10 percent. What will the...

Bassett Fruit Farm expects its EBIT to be $333,000 a year forever.
Currently, the firm has no debt. The cost of equity is 12.2 percent
and the tax rate is 35 percent. The company is in the process of
issuing $2.2 million worth of bonds at par that carry an annual
coupon of 5.8 percent. What is the unlevered value of the
firm?

Two identical firms (except for leverage) have perpetual
earnings before interest and tax (EBIT) of $100K . One firm is
unlevered while the other has $1 million of 4% coupon perpetual
debt. cost of unlevered equity is 10 ½ % p.a. cost of levered
equity is 15% p.a. Current market yield on the debt is 9% p.a. and
there are no taxes. Assuming MM are correct, show how you can make
risk free profits for the same return. (hint: calculate...

An unlevered company with a cost of equity of 12% expects to
generate $4 million in earnings before interest and taxes (EBIT)
each year into perpetuity. The firm pays a tax rate of 31%.
Based on its after-tax earnings and cost of equity, what is the
value of the firm?
An unlevered company with a cost of equity of 14% generates $3
million in earnings before interest and taxes (EBIT) each year. The
decides to alter its capital structure to...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 12 minutes ago

asked 15 minutes ago

asked 35 minutes ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 1 hour ago

asked 2 hours ago

asked 2 hours ago