Question

Mowatt Lane Inc. has $4,000,000 in assets, 100% equity and perpetual EBIT of $600,000 a year. The firm has 60,000 shares outstanding at $60 a share. The firm’s cash flows should be discounted at 13% and its tax rate is 25%. It is going to borrow $1,000,000 at a 10% interest rate and use the money to repurchase stock at $60 a share.

What is the firm’s breakeven EBIT? Should it repurchase its shares?
Why?

What is Mowatt Lane Inc.’s value after it adds debt to the
capital

Answer #1

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...

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is 12%. It has 10,000 shares outstanding. The tax rate is 21%. AHP2
plans to borrow $40,000 and use the proceeds to repurchase shares.
The additional borrowing is not going to affect the firm’s credit
rating and accordingly the expected bankruptcy costs.
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issuance and _________...

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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...

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is 40%.
The company is considering issuing $5,000,000 of 10.0% bonds and
using the proceeds to repurchase stock.
The risk- free rate is 6.5%, the market risk premium is 5.0% and
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An all equity firm is expected to
generate perpetual EBIT of $50 million per year forever. The
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2. The firm
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Consider an all-equity firm with 125,000 shares outstanding.
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