A company currently has EBIT of $25,000 and is all-equity financed. The company expect EBIT to stay at this level indefinitely. Now assume the firm issues $50,000 of debt paying interest of 6% per year, using the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm? Make a case for why X is the best option and explain what considered, what assumptions you made and why?
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A company currently has EBIT of $25,000 and is all-equity financed. The company expect EBIT to stay at this level indefinitely. Now assume the firm issues $50,000 of debt paying interest of 6% per year, using the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm? Make a case for why X is the best option and explain what considered, what assumptions you made and why?
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- H3. The value of HILEV firm at the end of one year can be $50 m or $100 m with equal probability of 0.5. The firm has debt with a face value of $50 m that matures in one year. Assume that investors are risk-neutral and the risk free rate is zero. The CEO of the firm decides to substitute assets of the firm with more risky assets immediately, so that the value of the firm at the end of one year is either $30 m or $120 m with equal probability of 0.5. This asset substitution will lead to A. A gain of $10 million for stockholders and a loss of $10 million for bondholders B. A loss of $10 million for stockholders and a gain of $10 million for bondholders C. No gain or loss to debtholders or equity holders D. Both debtholders and equity holders will lose $10 million from the increased risk of the business Show proper step by step calculationSuppose instead that the company is about to pay a dividend of $2.00 per share. You also learn that the company is expected to have net income of $100 million, dividends of $50 million, and total equity of $1.5 billion (and that these relationships are expected to be stable). If the relevant required rate of return is 10%, what is the intrinsic value per share of the company’s stock?1. You want to invest in a company that guarantees your money's interest payments and returns at the maturity date as an investor. Which is the best option for this investment? 2. The ABC Incorporated paid a dividend of Php142.60 per share last year. Yesterday's last price is Php2,300 with the current yield of 6.2%. This problem is an example of _____. 3. Suppose that you have a stable job and you are thinking about your family's future once you retire from your job. What is an appropriate investment for retirees? a. bonds b. stocks c. stocks and bonds d. neither stocks nor bonds
- Assuming yourself to be Anna, narrate what you would have read in the file. Your narrative should include answers to the following: Note: 1 Retention ratio = 1 – Dividend payout ratio e) Does the fact that Chatterbox will allow only a 70% payout from the next period, allows it to grow? If so, what will be the growth rate if the firm successfully meets the investor expectation about the return on equity.Assuming yourself to be Anna, narrate what you would have read in the file. Your narrative should include answers to the following: Note: 1 Retention ratio = 1 – Dividend payout ratio a) Does the fact that Chatterbox will allow only a 70% payout from the next period, allows it to grow? If so, what will be the growth rate if the firm successfully meets the investor expectation about the return on equity.Fill in the Blank Question If the interest rate is 8%, the expected growth rate of a firm for the foreseeable future is 6%, and the firm's current profits are $60 million, then the value of the firm on the ex-dividend date is $ million. (Enter a number in the blank.) 4 Need help? Review these concept resources. UZZI
- 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…Give typing answer with explanation and conclusion A company has an expected EBIT of $18,000 in perpetuity, a tax rate of 35%, and a debt-to- equity ratio of 0.75. The interest rate on the debt is 9.5%. The firm’s WACC is 9%. a) If the company has not debt, what would be the unlevered cost of capital and firm value? b) Suppose now the company has $55,714.29 in outstanding debt. Using your answer to part a) and M&M Proposition I with taxes, what is the value of this levered firm?An all equity firm announces that it is going to borrow $11 million in debt and then keep that debt at a constant value relative to the overall value of the company. What would be the appropriate discount rate for the expected interest tax shields generated by this additional debt? A. Required return on debt B. Required return on equity C. Required return on Assets D. WACC
- A company needed ghc 1000 to finance its activities. The firm can financed this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghc 160 in good years and ghc80 in bad years. Assuming the firm faces equal probability of good and bad years; i What will be the stream of returns on both bonds and equity if the company chooses the following financing options a 100% equity financing b 50% equity financing c 20% equity financing d 0% equity financing ii Estimate the equity risk associated with each option in (i) iii As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why????As the general manager of a firm, you are presented with an investment proposal from one of your divisions. Its net present value, if discounted at the cost of capital for your firm (which is 15 percent), is $ 1 00,000, and its internal rate of return is 20 percent. (a) What are the economic interpretations of the net present value and internal rate of return figures? In other words, what do they mean? (b) What, if any, additional information would you like to have before approving the project?Consider the following security: Brous Metalworks Earnings Per Share, Time = 0 $2.00 Dividend Payout Rate 0.250 Return on Equity 0.150 Market Capitalization Rate 0.125 Required: Using the information in the tables above, please calculate the sustainable growth rate, dividends per share, and intrinsic value per share. Then solve for the present value of growth opportunities. (Use cells A5 to B8 from the given information to complete this question.) Brous Metalworks Sustainable Growth Rate Dividends per share (Next Year) Intrinsic Value No-Growth Value Per Share Present Value of Growth Opportunities (PVGO)