Selected financial information for Omni Consumer Products Inc. is provided in the table. Omni is currently all equity financed, but it is considering a leveragedcapital structure, details of which are presented in the Proposed column. Assume that Omni generates perpetual annual EBIT. Assume that all cash flows occurat the end of the year and we are currently at the beginning of a year. The company isn't growing so there are no investments in working capital or fixed assets.Assume that taxes are zero and all of net income is paid out as a dividend. Assume that the debt is perpetual with annual coupons at the rate ko. It will use theborrowed funds to repurchase (and cancel) shares. What will its equity be worth after the recapitalization?Selected Financial InformationOmni Consumer Products Inc.Capital StructureCurrentProposedEBIT$100,000$100,000Debt, D$0$428,571.43Cost of Debt, ko5%Cost of Equity, ku7%

To determine the equity value after the recapitalization, we need to calculate the new capital…

Answered: Selected financial information for Omni…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 5MC: David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing....

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David Lyons, CEO of Lyons Solar Technologies, is concerned about his firms level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: e. Suppose the expected free cash flow for Year 1 is 250,000 but it is expected to grow faster than 7% during the next 3 years: FCF2 = 290,000 and FCF3 = 320,000, after which it will grow at a constant rate of 7%. The expected interest expense at Year 1 is 128,000, but it is expected to grow over the next couple of years before the capital structure becomes constant: Interest expense at Year 2 will be 152,000, at Year 3 it will be 192,000 and it will grow at 7% thereafter. What is the estimated horizon unlevered value of operations (i.e., the value at Year 3 immediately after the FCF at Year 3)? What is the current unlevered value of operations? What is the horizon value of the tax shield at Year 3? What is the current value of the tax shield? What is the current total value? The tax rate and unlevered cost of equity remain at 25% and 14%, respectively.
The table below shows the forecast cash flow information of Good Time Inc. for the nextyear. The required debt payment in the next year is $88 million, with a current market valueof $60 million. The company pays no tax. If you invest in the corporate debt of Good TimeInc. today, what is your expected return on this investment?
The table below shows the forecast cash flow information of Good Time Inc. for the nextyear. The required debt payment in the next year is $88 million, with a current market valueof $60 million. The company pays no tax. If you invest in the corporate debt of Good TimeInc. today, what is your expected return on this investment? hand write please
Finance Selected financial information for the Bespin Gas Mining Corporation (BGMC) is provided in the table. BGMC is currently leveraged, but it is considering a new issue of equity which would be used to repay all of its debt. Financial details are presented in the Proposed column. Assume that BGMC generates perpetual annual EBIT. Assume that all cash flows occur at the end of the year and we are currently at the beginning of a year. The company isn’t growing so there are no investments in working capital or fixed assets. Assume that taxes are zero and that all of net income is paid out as a dividend. Assume that the debt is perpetual with annual coupons at the rate kD. Lando Calrissian is a shareholder in BGMC. He owns 10,500 shares. Answer the questions that follow. Capital Structure Current Proposed EBIT $100,000 $100,000 Debt, D $428,570 $0 Cost of Debt, kD 5% N/A Shares Outstanding 70,000 Stock Price $10.00 Part 1 Under the current (leveraged)…
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Consider the following data (be careful there might be some "unnecessary" information). EBIT = 176 Interest expense = 10 Tax rate = 30% Depreciation = 38 Net working capital = 30 Increase in net working capital = 10 Beginning of period Net PP&E = 50 Capex = 16 What is the free cash flow of the firm that year?
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Consider the following simplified financial statements for the Wesney Corporation (assuming no income taxes) The company has predicted a sales increase of 20 percent. Assume the company pays out half of its net income in the form of a cash dividend. Costs and assets vary with sales, but debt and equity do not. What is the external financing needed? (A negative answer should be indicated by a minus sign. Do not round intermediate calculations; round your answer to the nearest whole number, e.g., 32.) External financing needed
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Lo, Incorporated doesn't face any taxes and has $150 million in assets, currently financed entirely with equity. Equity is worth $7 per hare, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend bon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Probability of state Expected EBIT in state Pessimistic 0.45 $5 million Expected EPS Optimistic 0.55 $ 19 million The firm is considering switching to a 40-percent-debt capital structure, and has determined that it would have to pay a 12 percent vield on perpetual debt in either event. What will be the level of expected EPS if the firm switches to the proposed capital structure? Note: Do not round intermediate calculations and round your final answer to 2 decimal places.
Dalvi Incorporated is considering a new Investment. The table below lists the cash flows. Year Cash Flows -$25,400 1 $6,300 2 $7,700 3 $11,400 Calculate the Payback period Calculate the NPV and IRR. Assume that the interest rate is 0%.
Phosfranc Inc. is valuing the equity of a company using the free cash flow from equity, FCFE, approach and has estimated that the FCFE in the next three years will be $6.25, $7.70, and $8.36 million respectively. Beginning in year 4, the company expects the cash flows to increase at a rate of 4 percent per year for the indefinite future. It is estimated that the cost of equity is 12 percent. What is the value of equity in this company? (Do not round intermediate computations. Round final answer to the nearest million.) A) $77 million B) $95 million C) $109 million D) $60 million

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