Unlev Inc., an unlevered firm, has perpetual expected earnings before interest and taxes of $6.6 million...

Unlev Inc., an unlevered firm, has perpetual expected earnings before interest and taxes of $6.6 million per year, a tax rate of 34.00% and a beta of 1.5. The risk-free rate is 3.75% and the market risk-premium is 5.50%. Management is considering buying some of its stock back through an issue of debt. The firm will be issuing 5,280 bonds at a coupon rate of 7.00%. The face value of a bond = $1,000. The bonds will be offered at par.

a. What is the cost of equity of the unlevered firm?

b. What is the value of the unlevered firm?

c. What is the value of the levered firm?

d. What is the levered firm’s cost of capital?

e. Which firm (levered or unlevered) has the highest value? Discuss how leverage affects the value of a firm and whether it is optimal for firms to maintain a 100% leverage structure?

Solutions

Expert Solution

jeff jeffy answered 1 week ago

Next > < Previous

Related Solutions

Halogen Inc. is an unlevered firm, has expected earnings before interest and taxes of $2 million...

Halogen Inc. is an unlevered firm, has expected earnings before interest and taxes of $2 million per yearHalogen Inc tax rate is 40%, and the market value is V=E $12 million. The stock has a beta of 1.0, and the risk free rate is 9%. Assume that E(Rm)-Rf-6%). Management is considering the use of debt; debt would be issued and used to buy back stock, and the size of the firm would remain constant. The default free interest rate on...

NDR, Inc., an unlevered firm, has expected earnings before interest and taxes of $2 million per...

NDR, Inc., an unlevered firm, has expected earnings before interest and taxes of $2 million per year. NDR's tax rate is 40%, and the market value is V=E=$12 million. The stock has a beta of 1.0, and the risk free rate is 9%. [Assume that E(Rm)- Rf = 6%]. Management is considering the use of debt; debt would be issued and used to buy back stock, and the size of the firm would remain constant. The default free interest rate...

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $28.1 million in...

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $28.1 million in perpetuity. The current required return on the firm’s equity is 11 percent and the firm distributes all of its earnings as dividends at the end of each year. The company has 2.08 million shares of common stock outstanding and is subject to a corporate tax rate of 24 percent. The firm is planning a recapitalization under which it will issue $37.7 million of perpetual...

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $25.7 million in...

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $25.7 million in perpetuity. The current required return on the firm’s equity is 13 percent and the firm distributes all of its earnings as dividends at the end of each year. The company has 1.96 million shares of common stock outstanding and is subject to a corporate tax rate of 23 percent. The firm is planning a recapitalization under which it will issue $35.9 million of perpetual...

Newkirk, Inc., is an unlevered firm with expected annual earnings before taxes of $21.6 million in...

Newkirk, Inc., is an unlevered firm with expected annual earnings before taxes of $21.6 million in perpetuity. The current required return on the firmâ€™s equity is 16 percent, and the firm distributes all of its earnings as dividends at the end of each year. The company has 1.36 million shares of common stock outstanding and is subject to a corporate tax rate of 34 percent. The firm is planning a recapitalization under which it will issue $30.6 million of perpetual...

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $31.7 million in...

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $31.7 million in perpetuity. The current required return on the firm’s equity is 12 percent and the firm distributes all of its earnings as dividends at the end of each year. The company has 2.26 million shares of common stock outstanding and is subject to a corporate tax rate of 23 percent. The firm is planning a recapitalization under which it will issue $40.4 million of perpetual...

Newkirk, Inc., is an unlevered firm with expected annual earnings before taxes of $22.4 million in...

Newkirk, Inc., is an unlevered firm with expected annual earnings before taxes of $22.4 million in perpetuity. The current required return on the firm’s equity is 20 percent, and the firm distributes all of its earnings as dividends at the end of each year. The company has 1.44 million shares of common stock outstanding and is subject to a corporate tax rate of 35 percent. The firm is planning a recapitalization under which it will issue $31.4 million of perpetual...

Newkirk, Inc., is an unlevered firm with expected annual earnings before taxes of $22.4 million in...

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $31.3 million in...

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $31.3 million in perpetuity. The current required return on the firm’s equity is 11 percent and the firm distributes all of its earnings as dividends at the end of each year. The company has 2.45 million shares of common stock outstanding and is subject to a corporate tax rate of 22 percent. The firm is planning a recapitalization under which it will issue $40.1 million of perpetual...

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $27.7 million in...

Summers, Inc., is an unlevered firm with expected annual earnings before taxes of $27.7 million in perpetuity. The current required return on the firm’s equity is 14 percent and the firm distributes all of its earnings as dividends at the end of each year. The company has 2.06 million shares of common stock outstanding and is subject to a corporate tax rate of 23 percent. The firm is planning a recapitalization under which it will issue $37.4 million of perpetual...

Subjects