10 Norwell Inc. has equity with a market value of $900 million and a current debt to capital ratio of 10%. If Norwell has an optimal debt ratio of 40% and would like to borrow money and buy back stock right now, how much additional debt will the firm have to issue? a. $260 million b. $300 million c. $400 million d. $600 million e. None of the abov

10 Norwell Inc. has equity with a market value of $900 million and a current debt to capital ratio of 10%. If Norwell has an optimal debt ratio of 40% and would like to borrow money and buy back stock right now, how much additional debt will the firm have to issue? a. $260 million b. $300 million c. $400 million d. $600 million e. None of the abov

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 3P

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3. Toran plc. is an all-equity financed firm and generates earnings of £200 per year. Its current required rate of return on equity is 10% per annum. It is planning to issue corporate debt at a rate of 8% to achieve a debt-equity ratio of 50%. Toran plc. Assume that debt and earnings are perpetuities. What happens to the firm value after the debt issuance? Assume there are perfect capital markets. 100 0 200 0 250 0 400 0 450 0
Mf1. Please help answer this: Company XYZ is planning to repurchase part of its stock by issuing corporate debt. The firm’s debt-equity ratio will rise from 40% to 50 %. Currently, the firm has 50,000 debt outstanding. The cost of debt is 20% per year. The firm expects to have an EBIT of 25,000 per year in perpetuity. The firm XYZ pays no taxes. (You might need to use Modigliani-Miller Propositions to answer some of the questions.) a) What is the market value of firm XYZ before and after the stock repurchase? b) What is the expected return on the firm’s equity (ROE) before the announcement of the stock repurchase plan? c) What is the expected return on the equity of an identical all-equity firm? d) What is the expected return on the firm’s equity after the announcement of the stock repurchase plan?
7. Calculating Cost of Debt For the firm in Problem 6, suppose the book value of the debt issue is $135 million. In addition, the company has a second debt issue, a zero coupon bond with 12 years left to maturity; the book value of this issue is $65 million, and it sells for 64.3 percent of par. LO 2 What is the total book value of debt? The total market value? What is the aftertax cost of debt now?
Q3) Tanten Company has 200% debt and 80% equity. The borrowing rate is 12%. A. If you own 4% of the stock of Abacus, what is your dollar return if the company has net operating income of $750,000 and the over all capitalization rate , Ko, is 15%? Value of the firm is 500,000 B. What is the implied required rate of return on equity? C. What is the market value of stock and the return of stock? D. What is the market value of debt?
The FCFE (free cash flow to the equity) is projected to be $0.3 billion forever, the cost of equity equals 15% and the WACC is 10%. If the market value of the debt is $1.0 billion, what is the value of the equity using the free cash flow valuation approach? The firm does not have any short-term investments that are unrelated to operations. O $2 billion ⒸS3 billion $4 billion $1 billion
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $183,000 per year. The cost of equity is 13.1 percent and the tax rate is 21 percent. The firm can borrow perpetual debt at 6.3 percent. Currently, the firm is considering converting to a debt–equity ratio of .93. What is the firm's levered value? MM assumptions hold. A. $829,786 B. $1,215,262 C. $1,155,579 D. $997,511 E. $921,985
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10. Midwest Electric Company (MEC) uses only debt and common equity. It can borrow unlimited amounts at an interest rate of rd = 10% as long as it finances at its target capital structure, which calls for 45% debt and 55% common equity. Its last dividend was S2, its expected constant growth rate is 4%, and its common stock sells for $20. MEC's tax rate is 40%. What is the WACC? a. 10% b. 10.62% c. 13% d. 14.40% e. 15.50%
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1) A firm that is currently unlevered has WACC = rS = 10%/year. This company plans to do a recapitalization by issuing debt and repurchasing equity. After the recapitalization, the debt-to-equity (D/E) ratio will be 0.5. If the cost of debt, rD, is 6%, what will be rS after the recapitalization? 2) A firm with wD = 0.35 and wS = 0.65 plans to issue another $100 million of permanent debt. The firm's tax rate is 21%. The bonds will be issued at par with coupon rate = rD = 7%/year. The firm's WACC is 11%/year. By how much will the new debt change the value of the firm, and who will receive this value? A) Firm value will increase by $21 million, and all $21 million will go to the shareholders B) Firm value will increase by $9 million, and 35% will go to the bondholders, 65% to the shareholders C) Firm value will increase by $18.6 million, and 35% will go to the bondholders, 65% to the stockholders D) Firm value will increase by $21 million, and all $21 million will go to the…