24. Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.50. Foreach year into the indefinite future, Remex's free cash flow is expected to equal $25 million.Remex is considering changing its capital structure by issuing debt and using the proceeds tobuy back stock. It will do so in such a way that it will have a 30% debt-equity ratio after thechange, and it will maintain this debt-equity ratio forever. Assume that Remex's debt cost ofcapital will be 6.5%. Remex faces a corporate tax rate of 15%. Except for the corporate taxrate of 15%, there are no market imperfections. Assume that the CAPM holds, the risk-freerate of interest is 5%, and the expected return on the market is 11%.a. Using the information provided, complete the following table:Before change incapital structureAfter change incapital structureDebt-EquityRatio00.30Debt Costof CapitalN/A6.5%Equity Costof CapitalWeighted AverageCost of Capitalb. Using the information provided and your calculations in part a, determine the value of the tax shieldacquired by Remex if it changes its capital structure in the way it is considering.

Unlevered cost of equity is the cost of equity when there is no debt in the capital structure of the…

Answered: Remex (RMX) currently has no debt in…

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 8P

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13. Firm CCC has no debt. Existing assets generate earnings of $20mil. per year forever. Discount rate=10%. Firm has n shares (5 mil.) currently selling at P=$40 per share. Now firm plans to invest I=$40mil. in new project. Project will generate $5 mil. in new earnings per year forever. Firm will issue new shares to fund this new project. a. In an efficient capital market, what is the price that new shareholders are willing to pay for each share of Firm CCC’stock? What is the gain by existing shareholders? b. Suppose market is inefficient and new shares can be sold for $45, what is the gain/loss by new shareholders from purchasing these new shares?
a. Find Eagle's required external funds if it maintains a dividend payout ratio of 70% and plans a growth rate of 15% in 2020. b. If Eagle chooses not to issue new shares of stock, what variable must be the balancing item? c. What will be the value of this balancing item? d. Now suppose that the firm plans instead to increase long-term debt only to $1,100 and does not wish to issue any new shares of stock. What is now the balancing item? e. What will be the value of this new balancing item?
An all-equity firm consists of a single project that will produce a perpetual cash flow of either $100M (good state) or $30M (bad state) next year. The probability of the good state is 30 percent. The beta of the asset cash flows is 1.25 and the risk-free rate is 3 percent and the market risk premium is 8 percent. There are 6M shares outstanding. Suppose the firm announces it will issue $40M in debt. The debt has an interest rate of 8 percent, and will mature in 3 years. Because the debt is ___ , any bankruptcy costs would ___ the firm's share price after the announcement. a. Safe, not change b. risky, raise c. risky, lower
Parvis Inc. wants to calculate its cost of equity. The company paid a dividend of $0.40 this year which is growing at 6% annually. It also has a risk premium rate of 7%, WACC = 10%, a terminal FCF growth rate of 8%, and the following expected free cash flows for the next 3 years: 2020 2021 2022 If Parvis' current stock price is $12 and its average cost of debt is 4.5%, find: 1) Rs using the bond risk premium model; 2) Rs using the discounted dividend model. Parvis cost of equity using bond risk premium: 50 60 75 Parvis cost of equity using discounted dividend:
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?
18) ABC Inc expects to have EPS (earning per share) of $5 in the coming year. The firms plan to pay all of its earning as a dividend. With this expectation of no growth the firm current share price is $50 per share. Suppose that ABC Inc decided to cut its dividend payout rate to 80% for the foreseeable future and use retaining earning for the new project. Return on this project is expected to be 15%. Assuming equity cost of capital is unchanged, what effect would this new policy have on ABC`s stock (what is the new price)?
A company needs ghc1000 to finance its activities. The firm can finance this expenditure either by bonds or equity. Interest rate on bonds is 10%. The company can earn ghe 160 in good years and ghc80 in bad years. Assuming the firm faces one-quarter probability of good years; What will be the stream of returns on both bonds and equity if the company chooses the following financing options? i. a. 100% equity financing ii. 50% equity financing iii. 20% equity financing iv. 0% equity financing Estimate the equity risk associated with each option in (a) As an investor who wants to purchase a share in the company, which financing option will make you purchase the stock. Why? b. C.
25. Mackenzie Company has a price of $33 and will issue a dividend of $2.00 next year. It has a beta of 1.6, the risk-free rate is 5.8%, and the market risk premium is estimated to be 4.7%. a. Estimate the equity cost of capital for Mackenzie. b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? **round to two decimal places**
Wolfrum Technology (WT) has no debt. Its assets will be worth $467 million one year from now if the economy is strong, but only $295 million in one year if the economy is weak. Both events are equally likely. The market value today of its assets is $291 million. a. What is the expected return of WT stock without leverage? b. Suppose the risk-free interest rate is 5%. If WT borrows $139 million today at this rate and uses the proceeds to pay an immediate cash dividend, what will be the market value of its equity just after the dividend is paid, according to MM? c. What is the expected return of WT stock after the dividend is paid in part (b)? a. The unievered expected return of WT stock is (Round to two decimal places)
Hastings Corporation is interested in acquiring Visscher Corporation. Assume that the risk-free rate of interest is 4%, and the market risk premium is 5%. 21-1 - VALUATION Visscher currently expects to pay a year-end dividend of $1.99 a share (D1 = $1.99). Visscher’s dividend is expected to grow at a constant rate of 5% a year, and its beta is 0.8. What is the current price of Visscher’s stock? 21-2 - MERGER VALUATION Hastings estimates that if it acquires Visscher, the year-end dividend will remain at $1.99 a share, but synergies will enable the dividend to grow at a constant rate of 7% a year (instead of the current 5%). Hastings also plans to increase the debt ratio of what would be its Visscher subsidiary; the effect of this would be to raise Visscher’s beta to 1.05. What is the per-share value of Visscher to Hastings Corporation? 21-3 - MERGER BID On the basis of your answers to problems 21-1 and 21-2, if Hastings were to acquire Visscher, what would be the range of possible…
29. Mackenzie Company has a price of $36 and will issue a dividend of $2.00 next year. It has a beta of1.2, the risk-free rate is 5.5%, and the market risk premium is estimated to be 5.0%. a. Estimate the equity cost of capital for Mackenzie. What ___% b. Under the CDGM, at what rate do you need to expect Mackenzie's dividends to grow to get the same equity cost of capital as in part (a)? What __% **round to two decimal places**
Rolex, Inc. has equity with a market value of $20 million and debt with a market value of $10million. Assume the firm has no default risk and can borrow at the risk-free interest rate. Therisk-free interest rate is 5 percent per year, and the expected return on the market portfolio is11 percent. The beta of the company's equity is 1.2. The tax rate is 20%. What is the cost ofcapital for an otherwise identical all-equity firm? handwrite please

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