Question

27. Now that your firm has​ matured, you are considering adding debt to your capital structure...

27. Now that your firm has​ matured, you are considering adding debt to your capital structure for the first time. Your​ all-equity firm has a market value of $21 million and you are considering issuing ​$2.1 million in debt with an interest rate of 9​% and using it to repurchase shares. You pay a corporate tax rate of 25​%. Assume taxes are the only imperfection and the debt is expected to be permanent.
a. What will be the total value of the firm after the change in the capital​ structure?
b. What will be the value of the remaining equity after the change in the capital​ structure?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

ANSWER IS SHOWN IN MILLIONS OF DOLLARS AS NOTHING IS MENTIONED AND ROUNDED TO 4 DECIMALS

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Boxcars, Inc. has a capital structure consisting of $100MM in equity and $150MM in debt. With...
Boxcars, Inc. has a capital structure consisting of $100MM in equity and $150MM in debt. With this capital structure, the expected return to its equity is 18 percent, the expected return to its debt is 7 percent, and the market beta of Boxcars enterprise value is 1.68. The risk-free rate is 3 percent. The firm unexpectedly issues $110MM in new shares, using the cash to repurchase $110MM of its debt. After the repurchase, the remaining $40MM in debt is risk-free...
Boxcars, Inc. has a capital structure consisting of $100MM in equity and $150MM in debt. With...
Boxcars, Inc. has a capital structure consisting of $100MM in equity and $150MM in debt. With this capital structure, the expected return to its equity is 18 percent, the expected return to its debt is 7 percent, and the market beta of Boxcars enterprise value is 1.68. The risk-free rate is 3 percent. The firm unexpectedly issues $110MM in new shares, using the cash to repurchase $110MM of its debt. After the repurchase, the remaining $40MM in debt is risk-free...
Company TNT currently has zero debt in its capital structure, a total market value of $60...
Company TNT currently has zero debt in its capital structure, a total market value of $60 million, and an equity beta of 0.75. The company is considering a new capital structure, by issuing $25 million worth of debt and using the proceeds to buy back $25 million worth of equity (no impact on the firms total market value). The company’s corporate tax rate is 30%. Risk free rate is 6% and market return is 14%. How much would be the...
You are currently the CFO of a firm worth $1 billion and you are considering issuing...
You are currently the CFO of a firm worth $1 billion and you are considering issuing some additional perpetual debt in order to change your firm's capital structure. Your current beta is 0.93 and you currently have $124 million in debt. You are planning to issue $215 million in additional perpetual debt. Your firm faces a 35% corporate tax rate. Given that the current risk free rate is 2.83% and the current market risk premium is 5.11%, what will be...
The firm is trying to estimate its optimal capital structure. Right now, the firm has a...
The firm is trying to estimate its optimal capital structure. Right now, the firm has a capital structure that consists of 50% debt and 50% equity. The risk-free rate is 2.5% and the market risk premium is 12%. Currently the company's cost of equity, which is based on the SML. is 18.5% and its tax rate is 21%. What would be the firms estimated cost of equity if it were to change its capital structure to 40% debt and 60%...
A firm has zero debt and an overall cost of capital of 12.9 percent. The firm...
A firm has zero debt and an overall cost of capital of 12.9 percent. The firm is considering a new capital structure having a debt to equity ratio of .60. The interest rate on the debt would be 7.85 percent and the corporate tax rate is 22 percent. What would be the cost of equity with the new capital structure if you include taxes. 17.3 15.3 10.8 16.1 12.9
Markum Enterprises is considering permanently adding an additional $187 million of debt to its capital structure.​...
Markum Enterprises is considering permanently adding an additional $187 million of debt to its capital structure.​ Markum's corporate tax rate is 21%. a. Absent personal​ taxes, what is the value of the interest tax shield from the new​ debt? b. If investors pay a tax rate of 37% on interest​ income, and a tax rate of 20% on income from dividends and capital​ gains, what is the value of the interest tax shield from the new​ debt? a. Absent personal​...
Firm C currently has 250,000 shares outstanding with current market value of $47.40 per share and...
Firm C currently has 250,000 shares outstanding with current market value of $47.40 per share and generates an annual EBIT of $1,250,000. Firm C also has $1 million of debt outstanding. The current cost of equity is 8 percent and the current cost of debt is 5 percent. The firm is considering issuing another $2 million of debt and using the proceeds of the debt issue to repurchase shares (a pure capital structure change). It is estimated that the cost...
The capital structure of a firm consists of debt and equity. The firm has 100,000 bonds...
The capital structure of a firm consists of debt and equity. The firm has 100,000 bonds outstanding that are selling at par value. The par value of the bonds is $1,000. Bonds with similar characteristics are yielding a before-tax return of 7%. The company also has 5 million shares of common stock outstanding. The stock has a beta of 1.30 and sells for $50 a share. The rate of return on U.S. Treasury bills is 5% and the market rate...
A firm has an equity beta of 1.28. Currently, the market value of the firm’s debt...
A firm has an equity beta of 1.28. Currently, the market value of the firm’s debt is $10.00 million, while the market value of the firm’s equity is $30.00 million. The firm is considering adjusting their capital structure by either paying down debt or issuing additional debt. They want to consider the options. The firm faces a tax rate of 40.00%. The risk free rate in the economy is 2.00%, while the market portfolio risk premium is 6.00%. The cost...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT