Question

# Boogle is back and has no debt! Boogle has an equity Beta of 1.6, with market...

Boogle is back and has no debt! Boogle has an equity Beta of 1.6, with market expected return of 10% and a risk free rate of 3%. Boogle’s cash flows are expected to be 80 million next year and will grow at 3% per year. Boogle has 4 million shares outstanding. If Boogle wants to add debt and maintain an interest coverage ratio of 10%, where corporate taxes are 40% and the cost of debt capital will be 5%.

What will be Boogle’s value if you add leverage and maintain an interest coverage ratio of 10%?

Cost of capital(r) = Rf + * (Rm-Rf)

= 3% + 1.6 ( 10% - 3%) = 14.2%

Therefore Value of firm today = FCFF1/ (r-g)

= 80M / (14.2 - 3%)

= 975.61 Milllion

Therefore stock price = 975.61 / 4 = 243.90 per share (4 = no of outstanding shares in million)

Interest coverage ratio = EBIT/Interest expense

Interest expense = EBIT/ Interest coverage ratio

= OCF/(I-Tax)/IC ratio

= 80/(1-0.4)/10

= 13.33 Million

With 5% interest rate, total value of debt = 13.33/5 = 266.67 million

What will happen to boogle's Value?

Total value of boogle will remain same as before = 975.61 million, but neverthless total value of equity will reduce by amount of debt.

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