Question

Hanover Industries has expected earnings before interest and taxes of $630,300, an unlevered cost of equity of 14.7 percent, and a combined tax rate of 23 percent. The company also has 11,000senior bonds outstanding that carry a coupon rate of 7 percent. The debt is selling at par value. What is the value of this company? What is the target capital structure of the firm if the levered cost of equity is 17.25? Assume MM with taxes holds.

Answer #1

Cost of Equity levered = 17.25%

Unlevered Cost of Equity = 14.7%

Cost of Debt = Coupon rate = 7%

Value of Equity = EBIT*(1-Tax Rate)/Unlevered Cost of Equity =
630,300*(1-23%)/14.7% = 3301571.43

Value of company = Value of Unlevered firm + Debt * tax rate =
3301571.43+11000*1000*23% = 5,831,571.43

Cost of Levered Equity = Cost of Unlevered Equity +(Cost of
Unlevered Equity- Cost of Debt)* Debt*(1-Tax Rate)/ Equity

14.7% + (14.7%-12%)(1-30%)*D/E = 17.25%

0.0189 D/E = 17.25%-14.7%

Target D/E = 0.0255/0.0189 = 1.35

Please Discuss in case of Doubt

Best of Luck. God Bless

Please Rate Well

Hanover Industries has expected earnings before interest and
taxes of $630,300, an unlevered cost of equity of 14.7 percent, and
a combined tax rate of 23 percent. The company also has 11,000
senior bonds outstanding that carry a coupon rate of 7 percent. The
debt is selling at par value. What is the value of this company?
What is the target capital structure of the firm if the levered
cost of equity is 17.25? Assume MM with taxes holds.

5. Hanover Industries has expected earnings before interest and
taxes of $630,300, an unlevered cost of equity of 14.7 percent, and
a combined tax rate of 23 percent. The company also has 11,000
senior bonds outstanding that carry a coupon rate of 7 percent. The
debt is selling at par value. What is the value of this company?
What is the target capital structure of the firm if the levered
cost of equity is 17.25? Assume MM with taxes holds.

L.A. Clothing has expected earnings before interest and taxes of
$2,300, an unlevered cost of capital of 12 percent
and a tax rate of 33 percent. The company also has $2,900 of debt
that carries an 8 percent coupon. The debt is selling at par value.
What is the value of this firm?

Heinz Incorporation has expected earnings before interest and
taxes of $2,843,270, an unlevered cost of capital of 10.2 percent,
and a tax rate of 25 percent. The company has $7,900,000 of debt
that carries a 6.6 percent coupon. The debt is selling at par
value. What is the value of this company? $24,412,506 $23,756,980
$22,881,397 $20,362,114 $25,644,382

An unlevered firm has a cost of capital of 16% and earnings
before interest and taxes of $225,000. A levered firm with the same
operations and assets has both a book value and a face value of
debt of $850,000 with an 8% annual coupon. Assume no taxes, no
bankruptcy. What is the value of equity for the levered firm?
Select one:
A. 624,250
B. 556,250
C. 850,000
D. 556,250

Blaine Shoes, an unlevered firm, has a cost of capital of 15
percent and earnings before interest and taxes of $500,000. Salem
Shoes, A levered firm, has the same operations and assets has face
value of debt of $7000,000 with a coupon rate of 7.5 percent that
sells at par. The applicable tax rate is 35 percent. What is the
value of the levered firm?

Jemisen's firm has expected earnings before interest and taxes
of $1,400. Its unlevered cost of capital is 13 percent and its tax
rate is 34 percent. The firm has debt with both a book and a face
value of $1,800. This debt has a 7 percent coupon and pays interest
annually. What is the firm's weighted average cost of capital?
A) 12.03 percent
B) 12.88 percent
C) 12.50 percent
D) 11.97 percent
E) 12.20 percent

An unlevered company with a cost of equity of 11% generates $5
million in earnings before interest and taxes (EBIT) each year. The
decides to alter its capital structure to include debt by adding $5
million in debt with a pre-tax cost of 6% to its capital structure
and using the proceeds to reduce equity by a like amount as to keep
total invested capital unchanged. The firm pays a tax rate of
28%.
Assuming that the company's EBIT stream...

Hanover Tech is currently an all equity firm that has 320,000
shares of stock outstanding with amarket price of $19 a share. The
current cost of equity is 15.4%and the tax rate is 34%. The firm is
considering adding $1.2 million of debt with a coupon rate of 8%to
itscapital structure. The debt will be sold at par value. What is
the levered value of the equity?
******Answer is $5,288,000 if you could explain why when
computing you multiple the...

A company has an unlevered cost of capital of 12 percent, a tax
rate of 34 percent, and expected earnings before interest and taxes
of $1,300. The company has $2,200 in bonds outstanding that have an
8 percent coupon and pay interest annually. The bonds are selling
at par value.
What is the cost of equity?
How do you calculate this?

ADVERTISEMENT

Get Answers For Free

Most questions answered within 1 hours.

ADVERTISEMENT

asked 3 minutes ago

asked 3 minutes ago

asked 3 minutes ago

asked 3 minutes ago

asked 5 minutes ago

asked 11 minutes ago

asked 16 minutes ago

asked 37 minutes ago

asked 39 minutes ago

asked 45 minutes ago

asked 52 minutes ago

asked 52 minutes ago