Maslyn Corp. has an EBIT of $985,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 10 percent, and the corporate tax rate is 35 percent. The company also has a perpetual bond issue outstanding with a market value of $1.94 million. What is the value of the company? (Enter your answer in dollars, not millions of dollars (e.g. 1,234,567). Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16).) Value of the company %24

Maslyn Corp. has an EBIT of $985,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 10 percent, and the corporate tax rate is 35 percent. The company also has a perpetual bond issue outstanding with a market value of $1.94 million. What is the value of the company? (Enter your answer in dollars, not millions of dollars (e.g. 1,234,567). Do not round intermediate calculations and round your answer to 2 decimal places (e.g., 32.16).) Value of the company %24

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

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Stevenson's Bakery is an all-equity company that has projected perpetual earnings before interest and taxes of $43,700 a year. The cost of equity is 15.2 percent, and the tax rate is 22 percent. The company can borrow money at 7.15 percent. If the company borrows $50,000, what will be its levered value? Multiple Choice O O O O $229,507 $187,613 $203,682 $189,919 $235,250
The Alcatel has a tax rate of 30%. The company can raise debt at a 12% interest rate and the last dividend paid by Alcatel was PO.90. Alcatel's common stock is selling for P8.59 per share, and its expected growth rate in earnings and dividend is 5%. If Alcatel issue new common stock, the flotation cost incurred will be 10%. Alacatel plans to finance all capital expenditures with 30% debt and 70% equity. a. What is alcatel's weighed average cost of capital if the firm has sufficient retained earnings to fund the equity portion of its capital budget? b. What is alcatel's weighted average cost of capital if the firm raised the equity portion by selling new shares of stock? c. What is the cost of equity if its retained earnings can cover only 60% of its equity requirements and the rest new issue of common shares will be sold? show solution
ROSE has no debt, its shareholders require a return of 10%, and EBIT of $25,000 which is paid annually in perpetuity starting in one year. JISOO is identical except it is partially financed by $40,000 of perpetual bonds with an annual coupon of 7%. The tax rate is zero. What is the cost of equity for JISOO?
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?
Yo
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 35 percent to 50 percent. The firm currently has $3.1 million worth of debt outstanding. The cost of this debt is 8 percent per year. The firm expects to have an EBIT of $1.3 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and…
Shadow, Inc., is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4.5 million worth of debt outstanding. The cost of this debt is 8 percent per year. Shadow expects to have an EBIT of $1.8 million per year in perpetuity. Shadow pays no taxes. (1) What is the market value of Shadow, Inc. before and after the repurchase announcement? (2) What is the expected return on the firm’s equity before the announcement of the stock repurchase plan?
CS Cycles is currently financed with 50 percent debt and 50 percent equity. The firm pays $150 each year to its debt investors (at a 12 percent cost of debt), and the debt has no maturity date. What will be the value of the equity if the firm repurchases all of its debt and raises the funds to do this by issuing equity?
Prokter and Gramble (PG) currently has $25 billion outstanding debt. PG has a cost of equity capital of 7 percent and a cost of debt capital of 4%. PG's tax rate is 30 percent. PG is expected to have EBIT of $9 billion at the end of this year. If PG's cash flows to equity holders grow at 3% in perpetuity, what is the market value for PG's equity? O $105 billion O $140 billion $165 billion O $100 billion
PMF, Inc., can deduct interest expenses next year up to 30% of EBIT. This limit is equally likely to be $20 million, $28 million, or $36 million. Its corporate tax rate is 38%, and investors pay a 30% tax rate on income from equity and a 35% tax rate on interest income. a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year? b. What is the effective tax advantage of debt for interest expenses in excess of $36 million? (Ignore carryforwards). c. What is the expected effective tax advantage of debt for interest expenses between $20 million and $28 million? (Ignore carryforwards). d. What level of interest expense provides PMF with the greatest tax benefit? a. What is the effective tax advantage of debt if PMF has interest expenses of $16 million this coming year? %. (Round to one If PMF has interest expenses of $16 million this coming year, the effective tax advantage is decimal place.)
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).
You are given the following table showing the end of year net debt for a target firm. The cost of net debt is 8.2 percent, and the corporate tax rate is 21 percent. Calculate the present value of the tax shield generated in the four- year period. Year End of Year Net Debt O $81,347 O $26,898 O $21,624 O $102,970 0 $192,500 1 2 7 3 4 $207,000 $390,000 $455,000 $510,000

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