Question

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
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Answer #1

The correct answer is $750 Million

The value of the company is the net worth of the company which is the total of Market capitalisation, Debt, Preferemce shareholders and Minority shares also, Therefore, In this case, we have given

Value of UnLevered Firm - 500 Million

Debt Raised - 250 Million

Value of Unkevered firm - Value of levered firm + Debt

= 500 + 250

= 750 Million

The EBIT and cost of capital is used to determine the operational profits of the company.

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