Question

3. Five J Ventures Co. has and expected perpetual EBITDA of $83,000 per year. It’s borrowing...

3. Five J Ventures Co. has and expected perpetual EBITDA of $83,000 per year. It’s borrowing cost is8%; but has no debt. Its cost of unlevered equity is 13%.
a. If the tax rate is 35%, what is the value of the firm? (25 pts)
b. What will be value of the firm be if it borrows $125,000 and uses the proceeds to repurchase shares?
c. What is the value of the equity of the levered firm?

please give formulas and full work.
Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

EBITDA = $83000

Since the firm has no debt

EBT = $83000

Tax Rate = 35%

Tax amount = 35% * 83000 = 29050

Earnings after tax = $83000 - $29050 = $53950

A) Value of the firm = Earnings after tax / cost of equity

= 53950 / 13%

= $415000

B) Since the firm is all equity

Equity of the firm = $41500

Debt infused = $125000

Borrowing cost = 8%

EBITDA = $83000

Interest on debt = 125000 * 8% = $10000

EBT = $83000 - $10000 = $73000

Tax = 73000 * 35% = $25550

Earning after tax = $47450

Since the funds are used to repurchase equity ,

New equity of the firm = $415000 - $125000 = $290000

Debt = $125000

Value of the levered firm = Equity + liabilities = $290000 + $125000 = $415000

C) The value of equity of the levered firm = Earning After Tax / Cost of equity

= 47450 / 13%

= $365000

Value of equity of the levered firm is $365000

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
An all equity firm is expected to generate perpetual EBIT of $100 million per year forever....
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 generate perpetual EBIT of $100 million per year forever....
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...
Find the value of levered equity for this firm. Assume the firm has perpetual cash flows....
Find the value of levered equity for this firm. Assume the firm has perpetual cash flows. Use Miller & Modigiiani's Proposition II concerning the cost of equity. 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%
CB expects its EBIT to be $55,000 every year forever. The firm can borrow at 6...
CB expects its EBIT to be $55,000 every year forever. The firm can borrow at 6 percent. The company currently has no debt, and its cost of equity is 11 percent. If the tax rate is 35 percent, what is the value of the firm? What will the value be if the company borrows $125,000 and uses the proceeds to repurchase shares?
The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual...
The A. J. Croft Company (AJC) currently has $200,000 market value (and book value) of perpetual debt outstanding carrying a coupon rate of 6 percent. Its earnings before interest and taxes (EBIT) are $100,000, and it is a zero-growth company. AJC's current unlevered beta is 0.5, and its tax rate is 40 percent. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. The firm is considering moving to a capital structure that...
Joe Schmoe & Co expects its dividends to be $85,000 every other year forever, with the...
Joe Schmoe & Co expects its dividends to be $85,000 every other year forever, with the first payment occurring two years from today. The firm can borrow at an EAR of 11%, currently has no debt, and has an effective annual cost of equity of 18%. The corporate tax rate is 35%. Assume tax credits for losses and no financial distress costs. (a) Calculate the value of the firm. (b) What will firm value be if it borrows $60,000 in...
An all equity firm is expected to generate perpetual EBIT of $50 million per year forever....
An all equity firm is expected to generate perpetual EBIT of $50 million per year forever. The corporate tax rate is 0% in a fantasy no tax world. The firm has an unlevered (asset or EV) Beta of 1.0. The risk-free rate is 5% and 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...
Meyer & Co. expects its EBIT to be $66,000 every year forever. The firm can borrow...
Meyer & Co. expects its EBIT to be $66,000 every year forever. The firm can borrow at 8 percent. Meyer currently has no debt, and its cost of equity is 14 percent.    If the tax rate is 35 percent, what is the value of the firm? (Do not round intermediate calculations. Round your answer to 2 decimal places, e.g., 32.16.)      Value of the firm $       What will the value be if the company borrows $140,000 and uses...
Cede & Co. expects its EBIT to be $82125 every year forever. The firm can borrow...
Cede & Co. expects its EBIT to be $82125 every year forever. The firm can borrow at 9%. Cede currently has no debt, and its cost of equity is 22%. The tax rate is 35%. What is the firm’s cost of equity capital after borrowing $45,000 and using the proceeds to repurchase shares (i.e., after recapitalization)? (Answer in percentage terms and round to 2 decimal places. Do not round intermediate calculations.)
Company U has no debt outstanding currently and the cost of equity is 12%. Its EBIT...
Company U has no debt outstanding currently and the cost of equity is 12%. Its EBIT is expected to be $ 201896 every year forever. The tax rate is 35%. Calculate the value of the firm. Company U has no debt outstanding currently and the cost of equity is 12%. Its EBIT is expected to be $ 201896 every year forever. The tax rate is 35%.Calculate the value of the firm if it borrows $ 453493 and uses the proceeds...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT