Question

Wild Berry (WB) will remain in business for one more year. At the end of next...

Wild Berry (WB) will remain in business for one more year. At the end of next year, the firm will generate a liquidating cash flow of $370M in a boom year and $150M in a recession year; both states are equally likely. The cost of equity for the unlevered firm is rU = 10%. The firm’s outstanding debt matures in a year and has a market (and book) value of $150M today. The interest payment on this debt is $15M at the end of next year. The corporate tax is ?c = 35%. Corporate taxes is the only relevant market imperfection.

23. What is WB’s value as an unlevered firm (VU )?

(A) $ 236.4M

(B) $ 260.0M

(C) $ 336.4M

(D) $ 370.0M

24. Given the value of debt today, the cost of debt (rD) is: hint: the promised debt payment in a year is the book value plus interests.

(A) 4.5%

(B) 5.0%

(C) 5.5%

(D) 10.0%

25. If the discount rate for the interest tax shield is rIT S = 5%, the value of the interest tax shield (P V (IT S)) is:

(A) $ 2.5M

(B) $ 5.0M

(C) $ 6.0M

(D) $ 7.5M

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