A company just issued $140000 of perpetual 9% debt and used the proceeds to repurchase stock. The company expects to generate 121000 of EBIT in perpetuity. The company distributes all its earnings as dividends at the end of each year. The firm's unlevered cost of capital is 10% and the tax rate is 40%. Use FTE to calculate the value of the company's equity. Your Answer:

A company just issued $140000 of perpetual 9% debt and used the proceeds to repurchase stock. The company expects to generate 121000 of EBIT in perpetuity. The company distributes all its earnings as dividends at the end of each year. The firm's unlevered cost of capital is 10% and the tax rate is 40%. Use FTE to calculate the value of the company's equity. Your Answer:

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

The following was collected with regards to Blue Co.: · The capital structure is 60% equity funded.· The company anticipates that it will need to raise new ordinary shares for this year. Total flotation costs will be equal to the 7.5% of the amount issued.· The yield to maturity of the company’s bonds is 9%.· Applicable tax rate is 30%.· The year-end dividend is forecasted to be P0.25 per share.· The firm expects that its dividend will grow yearly at a constant rate of 3%.· The company’s ordinary share price is P32. What is the weighted cost of debt?
Yo
The excel Machinery has the current capital structure of 65% equity and 35% debt. Its net income in the current year is $250,000. The company is planning to launch a project that will requires an investment of $175,000 next year. Currently the share of excel machinery is $25/share.How much dividend excel Machinery can pay its shareholders this year and what is dividend payout ratio of the company? Assume the Residual Dividend Payout Policy applies.
The Giant Machinery has the current capital structure of 65% equity and 35% debt. Its net income in the current year is $250,000. The company is planning to launch a project that will requires an investment of $175,000 next year. Currently the share of Giant machinery is $25/share. How much dividend Giant Machinery can pay its shareholders this year and what is dividend payout ratio of the company? Assume the Residual Dividend Payout Policy applies.
Mitsui Ltd has 1 million issued shares and expects unlevered after-tax cash flows of $300,000 every year, forever. The company is all-equity financed, and its cost of capital is 12% p.a. The company's tax rate is 30%. The company has just announced its intention to borrow an additional $1,400,000 of perpetual debt (at a 7% p.a. interest rate) and use the proceeds to repurchase shares? a) Calculate the price per share of Mitsui Ltd immediately before the repurchase announcement. b) Calculate the price of a share in Mitsui Ltd immediately after the repurchase announcement but before the new borrowings occur (assuming that the market expects repurchase to occur with certainty and that there are no other information effects). c) Calculate the cost of equity capital for Mitsui Ltd after the share repurchase (ignoring other information effects).
Could you please solve these questions?
At this point, you may be confused why calling part of your in- vestment debt or equity makes a difference. Let’s walk through an example and compute your post-tax returns. Suppose $2 million of your investment is structured as debt and the remaining $8 million is equity. What happens each year after the company is set up? Well, using the $4 million EBIT, the company will first pay $2 million 50% = $1 million interest to you (as a debt investor). Then, on the remaining $4 $1 = $3 million of EBIT, the company pays corporate taxes of $3 20% = $0.6 million and is left with $2.4 million, which will be paid out to you (the equity holder) as dividend. Income Statement EBIT 4 -Interest expense 1 -Corporate taxes .6 = Net income of 2.4 million Therefore, the total returns to you (as an investor) is $1 million in interest and $2.4 million in dividends, which is a total of $3.4 million.4 Uncle Sam collected $0.6 million. The company will go bankrupt if its EBIT is strictly less than interest…
A corporation pays a dividend of $0.75 per year, and it's equity cost of capital is 14%. If the dividends continue indefinitely, what is the value of the company stock?
XYZ anticipates eaming $1,800,000 and paying $300,000 in dividends this year. XYZ's capital structure is 20% debt and 80% equity and its tax rate is 35%. Compute the equity breakpoint to the nearest dollar.
A company’s capital structure consists solely of debt and common equity. It can issue debt at 15% interest rate, and its common stock is expected to pay a $5 dividend per share next year. The stock’s price is currently $40; its dividend is expected to grow at a constant rate of 3 percent per year; its tax rate is 30 percent and its WACC is 14 percent. Calculate the after-tax cost of debt and the cost of common equity. What percentage of the company’s capital structure consists of common equity?
RDJ Corp. has expected earnings before interest and taxes (EBIT) of $5,000 (assumed to continue forever). Its unlevered cost of capital is 13.0% and its corporate tax rate is 35%. The company would like to borrow debt that amounts to $2,000 and use the proceeds to buy back shares. This debt has a 7.0% annual interest rate and pays interests annually. What is the firm's cost of equity, after this capital conversion? O A. O B. O C. O E. 10.05% 13.33% 15.14% OD. 13.82% 12.65% B 10 19 28 37 46 Finis
XYZ anticipates earning $1,000,000 and paying $200,000 in dividends this year. XYZ's capital structure is 20% debt and 80% equity and its tax rate is 35%. Compute the equity breakpoint to the nearest dollar. Your Answer:

SEE MORE QUESTIONS

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS