Question

XYZ Inc. is an unlevered firm with a market value of $9,000,000,000. The firm has a...

XYZ Inc. is an unlevered firm with a market value of $9,000,000,000. The firm has a constant stream of cash flow in perpetuity, which it pays out as dividends every year. Imagine that the managers of XYZ Inc. want to add leverage to the firm. Specifically, suppose that the managers announce a previously unanticipated plan that the firm will issue perpetual debt later today and use the proceeds to repurchase some of the equity so that, after the recapitalization is executed, the firm’s debt to value ratio will be 30%. The firm will maintain this debt-to-value ratio in perpetuity. The corporate tax rate is 20%. Calculate the amount of perpetual debt that the firm should issue today under this recapitalization plan.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

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
The following information applies to questions 11 thru 13. Today is December 31, 2019. ABC Inc....
The following information applies to questions 11 thru 13. Today is December 31, 2019. ABC Inc. generates a steady stream of cash flows and pays out all of its available cash flows in dividends and interest every year in perpetuity. Specifically, the firm pays $1 billion in dividends and $200 million in interest at the end of every year in perpetuity. ABC Inc. has just paid out its annual dividend and interest earlier today. The firm's cost of debt, rD,...
Company A, is an unlevered firm with expected annual earnings before taxes of $23,268,160 in perpetuity....
Company A, is an unlevered firm with expected annual earnings before taxes of $23,268,160 in perpetuity. The current required return on the firm’s equity is 15 percent, and the firm distributes all of its earnings as dividends at the end of each year. The company has 1.34 million shares of common stock outstanding and is subject to a corporate tax rate of 40 percent. The firm is planning a recapitalization under which it will issue $16,379,560 of perpetual 9.4 percent...
Domino, Inc. is an unlevered firm with a total market value of $5,880,000 with 200,000 shares...
Domino, Inc. is an unlevered firm with a total market value of $5,880,000 with 200,000 shares of stock outstanding. The firm has expected EBIT of $414,000 if the economy is normal and $760,000 if the economy booms. The firm is considering a $2,000,000 bond issue with an attached interest rate of 6.2 percent. The bond proceeds will be used to repurchase shares. Ignore taxes. What will the earnings per share be after the repurchase if the economy booms?
XYZ is a no-growth firm and its current unlevered value is VU=$800,000, and its marginal corporate...
XYZ is a no-growth firm and its current unlevered value is VU=$800,000, and its marginal corporate tax rate is 35%. Also, you model the Firm's PV of financial distress as a function of its debt ratio (D/VU) according to the relation:PV of financial distress=800,000 x (D/V)^2. The optimal percentage of perpetual debt (D) to the levered firm value (i.e. D/VL, the effective debt/value-ratio), given debt proceeds are used to buy back stock, is closest to: a) 0.25 b) 0.6 c)...
Lake Corp. is currently unlevered and has a value of $500 million. The firm will issue...
Lake Corp. is currently unlevered and has a value of $500 million. The firm will issue $250 million of debt and use the proceeds to repurchase equal amount of equity. What is the estimated value of the company after the repurchase program? There are no taxes and no bankruptcy costs. Cannot be determined without EBIT and cost of capital. $750 million $500 million $250 million
Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $31.7 million in...
Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $31.7 million in perpetuity. The current required return on the firm’s equity is 12 percent and the firm distributes all of its earnings as dividends at the end of each year. The company has 2.26 million shares of common stock outstanding and is subject to a corporate tax rate of 23 percent. The firm is planning a recapitalization under which it will issue $40.4 million of perpetual...
XYZ Inc. is financed equally by debt and equity, each with a market value of $1.1...
XYZ Inc. is financed equally by debt and equity, each with a market value of $1.1 million. The cost of debt is 5.1%, and the cost of equity is 10.1%. The company now makes a further $275,000 issue of debt and uses the proceeds to repurchase equity. This causes the cost of debt to rise to 5.6% and the cost of equity to rise to 11.43%. Assume the firm pays no taxes. How much debt does the company now have?...
Ventec is an unlevered firm with a total market value of $5,320,000 with 420,000 shares of...
Ventec is an unlevered firm with a total market value of $5,320,000 with 420,000 shares of stock outstanding. The firm has expected EBIT of $400,000 if the economy is normal and $700,000 if the economy booms. The firm is considering a $2,200,000 bond issue with an attached interest rate of 6.3 percent. The bond proceeds will be used to repurchase shares. Ignore taxes. What will the earnings per share be after the repurchase if the economy booms?
6，A company has an EBIT of $4,865 in perpetuity. The unlevered cost of capital is 16.70%,...
6，A company has an EBIT of $4,865 in perpetuity. The unlevered cost of capital is 16.70%, and there are 27,970 common shares outstanding. The company is considering issuing $10,660 in new bonds at par to add financial leverage. The proceeds of the debt issue will be used to repurchase equity. The YTM of the new debt is 11.75% and the tax rate is 36%. What is the cost of the levered equity after the restructuring?
Scenario: Hightower, Inc. plans to announce it will issue $2.0 million of perpetual debt and use...
Scenario: Hightower, Inc. plans to announce it will issue $2.0 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will sell at par with a coupon rate of 5%. Hightower, Inc. is currently an all-equity company worth $7.5 million with 400,000 shares of common stock outstanding. After the sale of the bonds, the company will maintain the new capital structure indefinitely. The company currently generates annual pretax earnings of $1.5 million. This level of earnings...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT