Question

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%?

Answer #1

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.

Please press the "Thumbs up" if this has helped you, thanks.

Acme Storage has a market capitalization of $104
million, and debt outstanding of $136 million. Acme plans to
maintain this same debt-equity ratio in the future. The firm pays
an interest of
7.5% on its debt and has a corporate tax rate of
38%.
a. If Acme's free cash flow is expected to be $21.60
million next year and is expected to grow at a rate of 3% per
year, what is Acme's WACC?
b. What is the value of...

Kohwe Corporation plans to issue equity to raise $60
million to finance a new investment. After making the investment,
Kohwe expects to earn free cash flows of $11 million each year.
Kohwe currently has 5 million shares outstanding, and it has no
other assets or opportunities. Suppose the appropriate discount
rate for Kohwe's future free cash flows is 8%, and the only
capital market imperfections are corporate taxes and financial
distress costs.
a. What is the NPV of Kohwe's investment?...

Kohwe Corporation plans to issue equity to raise $40 million to
finance a new investment. After making the investment, Kohwe
expects to earn free cash flows of $8 million each year. Kohwe
currently has 5 million shares outstanding, and it has no other
assets or opportunities. Suppose the appropriate discount rate for
Kohwe's future free cash flows is 7%, and the only capital market
imperfections are corporate taxes and financial distress costs.
a. What is the NPV of Kohwe's investment?...

Your firm has a market capitalization of 60,000,000 and debt of
20,000,000. It intends to maintain this debt-to-equity ratio. Free
cash flows for the next year are 4,000,000. They are expected to
grow 5% per year. The equity cost of capital is 0.12. The debt cost
of capital is the risk-free rate. The corporate tax rate is 0.20.
Calculate the present value of the tax shield assuming it is risk
free.

A firm has $50 million in 10-year debt with a YTM of 9% and a
coupon of 10% ang thus selling at premium of $64.18
It also has 200,000 shares of preferred stock with a $4 dividend
that sells for $90 a share and common stockwith a book value of $80
million and a par value of $5 a shre that sells for $50 a
share.
The common stock pays a dividend of $4 which is expected to grow
at...

Restex has a debt-equity ratio of 0.56, an equity cost of
capital of 18%, and a debt cost of capital of 14%. Restex's
corporate tax rate is 21%, and its market capitalization is $272
million.
a. If Restex's free cash flow is expected to be $3 million one
year from now and will grow at a constant rate, what expected
future growth rate is consistent with Restex's current market
value?
If Restex's free cash flow is expected to be $3...

Restex has a? debt-equity ratio of 0.69?, an equity cost of
capital of 13%?, and a debt cost of capital of 10%. Restex's
corporate tax rate is 38%?, and its market capitalization is $294
million.
a. If? Restex's free cash flow is expected to
be $11 million one year from now and will grow at a constant? rate,
what expected future growth rate is consistent with? Restex's
current market? value?
b. Estimate the value of? Restex's interest tax
shield.

Restex has a debt-equity ratio of 0.62, an equity cost
of capital of 14%, and a debt cost of capital of 11%. Restex's
corporate tax rate is 30%, and its market capitalization is $163
million.
a. If Restex's free cash flow is expected to be $3
million one year from now and will grow at a constant rate, what
expected future growth rate is consistent with Restex's current
market value?
b. Estimate the value of Restex's interest tax
shield.

SMU, Inc. has equity with a market value of $20 million and debt
with a market value of $10 million. SMUpays 8% interest on its debt
per year, and the expected return on the market portfolio over the
next year is 18%. The beta of SMU’s equity is .90. The firm pays no
taxes.
a. What is SMU’s debt to equity ratio? What is SMU’s weighted
average cost of capital?
b. What is the cost of capital for an otherwise...

Slecat Corp. is in the 40% tax bracket and has a capital
structure that is composed entirely of equity. They are considering
altering its capital structure to take advantage of prevailing
interest rates. After consulting with several investment bankers,
they obtain a before-tax cost of debt estimate of 8% if they
recapitalize to 40% debt and 60% equity. The firm will use the
proceeds from the debt issuance to repurchase shares of common
stock.
The corporation's existing stock has a...

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 34 minutes ago

asked 49 minutes ago

asked 56 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 1 hour ago

asked 2 hours ago

asked 2 hours ago