Question
In: Finance
Section 2: Capital Structure An unlevered company operates in perfect markets and has earnings before interest...
Section 2: Capital Structure
-
An unlevered company operates in perfect markets and has earnings before interest and taxes (EBIT) of $3m. Assume that the required return on assets for firms in this industry is 10%. The firm issues $15m worth of debt with a required return of 6% and uses the proceeds to repurchase outstanding stock. There are no corporate or personal taxes.
a) What is the market value of the firm and required return of this firm’s stock before the repurchase transaction, according to M & M Proposition I?
b) What is the market value of the firm and the required return and the required return on the firms remaining stock after the repurchase transaction, according to M & M Proposition II?
Solutions
jeff jeffy answered 5 months agoRelated Solutions
An unlevered firm has a cost of capital of 13.6 percent and earnings before interest and...
An unlevered firm has a cost of capital of 13.6 percent and
earnings before interest and taxes of $138,000. A levered firm with
the same operations and assets has both a book value and a face
value of debt of $520,000 with an annual coupon of 7 percent. The
applicable tax rate is 21 percent. What is the value of the levered
firm? Multiple Choice
$996,421
$907,679
$1,184,929
$910,818
$1,191,506
An unlevered firm has a cost of capital of 13.6 percent and earnings before interest and...
An unlevered firm has a cost of capital of 13.6 percent and
earnings before interest and taxes of $138,000. A levered firm with
the same operations and assets has both a book value and a face
value of debt of $520,000 with an annual coupon of 7 percent. The
applicable tax rate is 21 percent. What is the value of the levered
firm?
Dakota Co. has expected earnings before interest and taxes of $8,100, an unlevered cost of capital...
Dakota Co. has expected earnings before interest and taxes of
$8,100, an unlevered cost of capital of 10 percent, and debt with
both a book and face value of $14,000. The debt has an 8 coupon.
The tax rate is 34 percent. What is the value of the firm?
A firm has expected earnings before interest and taxes of $1,700. Its unlevered cost of capital...
A firm has expected earnings before interest and taxes of
$1,700. Its unlevered cost of capital is 13 percent and its tax
rate is 34 percent. The firm has debt with both a book and a face
value of $2,700. This debt has a 7 percent coupon and pays interest
annually. What is the firm's weighted average cost of capital?
Still having trouble understanding how to answer WACC
7) Steinway has expected earnings before interest and taxes of $1,360,000, an unlevered cost of capital...
7) Steinway has expected earnings before interest and taxes of
$1,360,000, an unlevered cost of capital of 9.8 percent, and a tax
rate of 25 percent. The company has $1,200,000 of debt that carries
a 6.4 percent coupon. The debt is selling at par value. Assume the
firm maintains this debt amount forever. What is the interest tax
shield of the firm in a given year? What is the value of the
firm?
A)$18,900 and $10,475,216
B)$18,600 and $10,475,216
C)$18,600...
Jemisen's firm has expected earnings before interest and taxes of $2,000. Its unlevered cost of capital...
Jemisen's firm has expected earnings before interest and taxes
of $2,000. Its unlevered cost of capital is 14 percent and its tax
rate is 34 percent. The firm has debt with both a book and a face
value of $2,600. This debt has a 9 percent coupon and pays interest
annually. What is the firm's weighted average cost of capital?
13.03 percent 13.33 percent 12.80 percent 13.71 percent 12.86
percent
Jemisen's firm has expected earnings before interest and taxes of $1,800. Its unlevered cost of capital...
Jemisen's firm has expected earnings before interest and taxes
of $1,800. Its unlevered cost of capital is 11 percent and its tax
rate is 33 percent. The firm has debt with both a book and a face
value of $2,500. This debt has a 6 percent coupon and pays interest
annually. What is the firm's weighted average cost of capital?
10.23 percent 10.29 percent 10.76 percent 10.46 percent 11.14
percent
Jemisen's firm has expected earnings before interest and taxes of $1,800. Its unlevered cost of capital...
Jemisen's firm has expected earnings before interest and taxes
of $1,800. Its unlevered cost of capital is 12 percent and its tax
rate is 35 percent. The firm has debt with both a book and a face
value of $2,900. This debt has an 8 percent coupon and pays
interest annually. What is the firm's weighted average cost of
capital?
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...
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