Question

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 of 4%, and use this $100 million of proceeds to repurchase the same amount of common stock.

1. Calculate the new cost of equity, and the new WACC following this capital structure change. Also calculate the new equity Beta using the tax version of the formula, and assume a zero debt Beta.

Answer #1

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
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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...

Fortune Enterprises is an all-equity firm that is considering
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earnings before interest and taxes (EBIT) every year into
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Suppose the personal tax rate on interest income is 55%,...

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A. Calculate the...

6. 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...

Consider an all-equity firm with 125,000 shares outstanding.
Assume that EBIT=800,000 and that EBIT will remain constant, the
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Now assume the firm is considering issuing $1.2m in debt at
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Find the value of levered equity for this firm.
Assume the firm has perpetual cash flows. Use Miller &
Modigiiani's Proposition II concerning the
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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%

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each year into perpetuity. The firm pays a tax rate of 26%.
Based on its after-tax earnings and cost of equity, what is the
value of the firm?
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decides to alter its capital structure to...

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