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A company has a market value of equity of $465,710, and a market value of debt...

A company has a market value of equity of $465,710, and a market value of debt of $391,540. The company's levered cash flow (i.e. cash flow after paying all interest) is $75,795 and is distributed annually as dividends in full. The interest rate on the debt is 9.22%. You own $59,230 worth of the market value of the company's equity. Assume that the cash flow is constant in perpetuity, there are no taxes, and you can borrow at the same rate that the company can. Suppose the company decides to pay down its entire debt by issuing new equity at the current share prices. If you want to maintain your net cash flow that was being received before this restructuring without investing any more of your own money, how much must you borrow to buy additional shares in the company? Question options: $46,062 $47,307 $48,552 $49,797 $51,042

Solutions

Expert Solution

Step-1 Preparing excel mode to use "Goal Seek Function"

Step-2 Running Goal Seek function to get the required borrowings (new equity purchases)

Therefore, money borrowed to buy additional shares in the companyis 49,797

jeff jeffy answered 2 years ago
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