Question

Three Piggies Enterprises has no debt. Its current total value is $74.4 million. Assume debt proceeds...

Three Piggies Enterprises has no debt. Its current total value is $74.4 million. Assume debt proceeds are used to repurchase equity.


Ignoring taxes, what will the company’s value be if it sells $34.2 million in debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to the nearest whole number, e.g., 32.)

Value of the firm $

Suppose now that the company’s tax rate is 34 percent. What will its overall value be if it sells $34.2 million in debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to the nearest whole number, e.g., 32.)

Value of firm $

Homework Answers

Answer #1

Solution:-

a) As per M&M Proposition I with no taxes, the value of levered firm(VL) is equal to the value of the unlevered firm(VU). So, with no taxes , the value of firm if it issue debt is =

         VU=VL=$74,400,000

Hence the value of the firm = $74,400,000

b) As per M&M Proposition I with taxes, the value of levered firm can be calculated as follows.

VL=VU+Tax rate*Debt

VL=Value of levered firm

VU= Value of unlevered firm = $74,400,000

Tax rate= 34%

Debt = $34,200,000

Note1:-" Tax rate*Debt " in above formula simply represent the present value of tax shield or PV of tax saving on interest cost.

Substituting the values we get,

VL=$74,400,000 +0.34*$34,200,000 =$86,028,000

Hence the value of firm = $86,028,000

Please feel free to ask if you have any query in the comment section.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Three Piggies Enterprises has no debt. Its current total value is $72 million. Assume debt proceeds...
Three Piggies Enterprises has no debt. Its current total value is $72 million. Assume debt proceeds are used to repurchase equity. Ignoring taxes, what will the company’s value be if it sells $33 million in debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Round your answer to the nearest whole number, e.g., 32.) Value of the firm            $ Suppose now that the company’s tax rate is 32 percent. What will...
Bird Enterprises has no debt. Its current total value is $49 million. Assume debt proceeds are...
Bird Enterprises has no debt. Its current total value is $49 million. Assume debt proceeds are used to repurchase equity. a. Ignoring taxes, what will the company’s value be if it sells $19.4 million in debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, round your answer to the nearest whole number, e.g., 1,234,567.) b. Suppose now that the company’s tax rate is 25 percent. What will its overall value be if it...
Newkirk, Inc., is an unlevered firm with expected annual earnings before taxes of $23 million in...
Newkirk, Inc., is an unlevered firm with expected annual earnings before taxes of $23 million in perpetuity. The current required return on the firm’s equity is 16 percent, and the firm distributes all of its earnings as dividends at the end of each year. The company has 1.5 million shares of common stock outstanding and is subject to a corporate tax rate of 35 percent. The firm is planning a recapitalization under which it will issue $32 million of perpetual...
Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts...
Fly-By-Night Couriers is analyzing the possible acquisition of Flash-in-the-Pan Restaurants. Neither firm has debt. The forecasts of Fly-By-Night show that the purchase would increase its annual aftertax cash flow by $330,000 indefinitely. The current market value of Flash-in-the-Pan is $9 million. The current market value of Fly-By-Night is $23 million. The appropriate discount rate for the incremental cash flows is 8 percent. Fly-By-Night is trying to decide whether it would offer 35 percent of its stock or $13 million in...
Trower Corp. has a debt–equity ratio of .90. The company is considering a new plant that...
Trower Corp. has a debt–equity ratio of .90. The company is considering a new plant that will cost $113 million to build. When the company issues new equity, it incurs a flotation cost of 8.3 percent. The flotation cost on new debt is 3.8 percent. What is the initial cost of the plant if the company raises all equity externally? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer...
Trower Corp. has a debt–equity ratio of .85. The company is considering a new plant that...
Trower Corp. has a debt–equity ratio of .85. The company is considering a new plant that will cost $104 million to build. When the company issues new equity, it incurs a flotation cost of 7.4 percent. The flotation cost on new debt is 2.9 percent. What is the initial cost of the plant if the company raises all equity externally? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer...
Trower Corp. has a debt–equity ratio of .90. The company is considering a new plant that...
Trower Corp. has a debt–equity ratio of .90. The company is considering a new plant that will cost $105 million to build. When the company issues new equity, it incurs a flotation cost of 7.5 percent. The flotation cost on new debt is 3 percent. What is the initial cost of the plant if the company raises all equity externally? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer...
Trower Corp. has a debt–equity ratio of .80. The company is considering a new plant that...
Trower Corp. has a debt–equity ratio of .80. The company is considering a new plant that will cost $106 million to build. When the company issues new equity, it incurs a flotation cost of 7.6 percent. The flotation cost on new debt is 3.1 percent. What is the initial cost of the plant if the company raises all equity externally? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer...
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...
Charisma, Inc., has debt outstanding with a face value of $5.7 million. The value of the...
Charisma, Inc., has debt outstanding with a face value of $5.7 million. The value of the firm if it were entirely financed by equity would be $26.2 million. The company also has 400,000 shares of stock outstanding that sell at a price of $53 per share. The corporate tax rate is 22 percent. What is the decrease in the value of the company due to expected bankruptcy costs? (Do not round intermediate calculations and enter your answer in dollars, not...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT