Question

Simmons Mineral Operations, Inc. is a company that has no debt and that has a forecasted...

Simmons Mineral Operations, Inc. is a company that has no debt and that has a forecasted EBIT of $364,000 perpetually. Right now the cost of equity of Simmons Mineral Operations, Inc. is 13.4 percent and the corporate tax rate is 34 percent. The firm is in the process of selling $980,000 worth of perpetual bonds with an annual interest rate of 5.8 percent at par. What is the value of Simmons Mineral Operations, Inc. after it issues debt?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Value of the Unlevered firm

Value of the Unlevered Firm = [EBIT x (1 – Tax rate)] / Cost of Equity

= [$364,000 x (1 – 0.34)] / 0.1340

= [$364,000 x 0.66] / 0.1340

= $240,240 / 0.1340

= $1,792,836

The Value of the Levered firm

The Value of the Levered firm = Value of the Unlevered firm + [Debt x Tax rate]

= $1,792,836 + [$980,000 x 0.34]

= $1,792,836 + $333,200

= $2,126,036

Therefore, the value of Simmons Mineral Operations, Inc. after it issuing debt will be $2,126,036

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
Simmons Mineral Operations, Inc. is a company that has no debt and that has a forecasted...
Simmons Mineral Operations, Inc. is a company that has no debt and that has a forecasted EBIT of $372,000 perpetually. Right now the cost of equity of Simmons Mineral Operations, Inc. is 13.6 percent and the corporate tax rate is 39 percent. The firm is in the process of selling $988,000 worth of perpetual bonds with an annual interest rate of 5.6 percent at par. What is the value of Simmons Mineral Operations, Inc. after it issues debt? What is...
Boston casino inc has an EBIT OF $46,000. It has no debt outstanding, a 34 percent...
Boston casino inc has an EBIT OF $46,000. It has no debt outstanding, a 34 percent corporate tax rate, and a 15 percent cost of capital. After issuing $ 75,000 of debt at 10 percent interest rate, what is the cost of equity of Boston casino inc?
Bassett Fruit Farm expects its EBIT to be $333,000 a year forever. Currently, the firm has...
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?
GTB, Inc., has a 20 percent tax rate and has $85,776,000 in assets, currently financed entirely...
GTB, Inc., has a 20 percent tax rate and has $85,776,000 in assets, currently financed entirely with equity. Equity is worth $6 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm’s expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Pessimistic Optimistic Probability of state 0.47 0.53 Expected EBIT in...
Rappaport Industries has 5,650 perpetual bonds outstanding with a face value of $2,000 each. The bonds...
Rappaport Industries has 5,650 perpetual bonds outstanding with a face value of $2,000 each. The bonds have a coupon rate of 6.4 percent and a yield to maturity of 6.7 percent. The tax rate is 35 percent. What is the present value of the interest tax shield? Debbie's Cookies has a return on assets of 8.1 percent and a cost of equity of 12.5 percent. What is the pretax cost of debt if the debt–equity ratio is .87? Ignore taxes....
GTB, Inc. has a 20 percent tax rate and has $86,076,000 in assets, currently financed entirely...
GTB, Inc. has a 20 percent tax rate and has $86,076,000 in assets, currently financed entirely with equity. Equity is worth $6 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm’s expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Pessimistic Optimistic Probability of state 0.52 0.48 Expected EBIT in...
GTB, Inc. has a 20 percent tax rate and has $85,836,000 in assets, currently financed entirely...
GTB, Inc. has a 20 percent tax rate and has $85,836,000 in assets, currently financed entirely with equity. Equity is worth $6 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm’s expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Pessimistic Optimistic Probability of state 0.48 0.52 Expected EBIT in...
The free cash flows (in millions) shown below are forecast by Simmons Inc. Year: 1 2...
The free cash flows (in millions) shown below are forecast by Simmons Inc. Year: 1 2 3 Free cash flow: -$25 $50 $55 respectively. If the weighted average cost of capital is 12% and the free cash flows are expected to continue growing at the same rate after Year 3 as from Year 2 to Year 3, what is the Year 0 value of operations, in millions? The balance sheet shows $25 million of short-term investments that are unrelated to...
GTB, Inc., has a 25 percent tax rate and has $67.92 million in assets, currently financed...
GTB, Inc., has a 25 percent tax rate and has $67.92 million in assets, currently financed entirely with equity. Equity is worth $6 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm’s expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below:        State Pessimistic Optimistic   Probability of state 0.40 0.60   Expected...
GTB, Inc. has a 20 percent tax rate and has $61.00 million in assets, currently financed...
GTB, Inc. has a 20 percent tax rate and has $61.00 million in assets, currently financed entirely with equity. Equity is worth $5 per share, and book value of equity is equal to market value of equity. Also, let’s assume that the firm’s expected values for EBIT depend upon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Pessimistic Optimistic Probability of state 0.45 0.55 Expected EBIT...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT