Pari Inc., an all-equity firm, has earnings before interest and taxes of $950,000 and an un-levered beta of .80. The firm has 200,000 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume M&M case I, with no taxes and no cost for the risk of default. All general M&M assumptions apply. a) What is the market value of the firm? (2 marks) b) What is the WACC for the firm. (1 mark) c) What is the market value of a share in the company and what is the EPS? (2 marks) d) What is the market value of the firm and the market value of the equity if they issue $5,000,000 in debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? (2 marks) e) What is the new cost of equity? (2 marks) f) According to CAPM, what is the new beta? (2 marks) g) What is the WACC? (2 marks) h) Explain what happens to the market value of the firm and the WACC if the firm increases its debt-to- equity ratio. (1 mark)

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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Question
Pari Inc., an all-equity firm, has earnings before interest and taxes of $950,000 and an un-levered beta of
.80. The firm has 200,000 common shares issued and outstanding. In the market, you observe that
Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%.
Assume M&M case I, with no taxes and no cost for the risk of default. All general M&M assumptions
apply.
a) What is the market value of the firm? (2 marks)
b) What is the WACC for the firm. (1 mark)
c) What is the market value of a share in the company and what is the EPS? (2 marks)
d) What is the market value of the firm and the market value of the equity if they issue $5,000,000 in
debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? (2 marks)
e) What is the new cost of equity? (2 marks)
f) According to CAPM, what is the new beta? (2 marks)
g) What is the WACC? (2 marks)
h) Explain what happens to the market value of the firm and the WACC if the firm increases its debt-to-
equity ratio. (1 mark)
Transcribed Image Text:Pari Inc., an all-equity firm, has earnings before interest and taxes of $950,000 and an un-levered beta of .80. The firm has 200,000 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume M&M case I, with no taxes and no cost for the risk of default. All general M&M assumptions apply. a) What is the market value of the firm? (2 marks) b) What is the WACC for the firm. (1 mark) c) What is the market value of a share in the company and what is the EPS? (2 marks) d) What is the market value of the firm and the market value of the equity if they issue $5,000,000 in debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? (2 marks) e) What is the new cost of equity? (2 marks) f) According to CAPM, what is the new beta? (2 marks) g) What is the WACC? (2 marks) h) Explain what happens to the market value of the firm and the WACC if the firm increases its debt-to- equity ratio. (1 mark)
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