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In: Finance

Found some previous answers to this, but only question 7 seems to be corrent. Would really...

Found some previous answers to this, but only question 7 seems to be corrent. Would really appreciate some help.

RosenBall, ASA expects a cash-equivalent EBIT of 200 million without any growth in the foreseeable future. The firm’s overall cost of capital (the required rate of return on assets) is 10%, the applicable tax-rate is 25%, and there are 200 million shares outstanding. RosenBall’s board of directors are currently looking into the possibility of refinancing the firm by borrowing 900 million at an interest rate of 5% per year. The loan is serviced by paying the annual interest, only. Problem 7 What is currently the all-equity value of RosenBall, ASA? State your answer as a whole number without any decimal points.

Problem 7 What is currently the all-equity value of RosenBall, ASA? State your answer as a whole number in millions without any decimal points.

The correct answer to problem 7 is 1500, this one i figured out.

Problem 8 With corporate taxes, only, what is RosenBall’s market value following the announcement of the refinancing plan? State your answer as a whole number in millions without any decimal points.

Problem 9 With corporate taxes, only, what is RosenBall’s market value per share following the announcement of the refinancing plan? State your answer to two decimal points.

Problem 10 With corporate taxes, only, what is RosenBall’s market value per share when the actual borrowing has taken place? State your answer to two decimal points.

Solutions

Expert Solution

As given,
EBIT = 200 million
WACC = 10%
(Weighted Cost of Capital)
T = 25%
(Tax Rate)
No. of Shares = 200 million
Loan Re-financed (MV of debt) = 900 million
Kd = 5%
(Loan interest rate)
Problem -7 The current all equity value of Rosenball, ASA can be derived by subtracting the current market value of debt (loan) from the total firm value
For a levered Firm,
Firm Value = Equity Value + Market Value of Debt
So, Equity Value = Firm Value - Market Value of Debt
First, we should calculate the firm value as
Firm Value = EBIT
WACC
Firm Value = 200
10%
Firm Value = 2000 million
Now, equity value = 2000 - 900
Current All-Equity value = 1100

For, solving the rest of the answers additional information is required regarding the previous rate of interest on the loan borrowed.

As it would be required to calculate the modified cost of capital.

jeff jeffy answered 3 months ago
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