Question
In: Statistics and Probability
The firm Kappa has just decided to undertake a major new project. As a result, the...
The firm Kappa has just decided to undertake a major new project. As a result, the value of the firm in one year’s time will be either $120 million (probability 0.25), $250 million (probability 0.5) or $360 million (probability 0.25). The firm is financed entirely by equity and has 10 million shares. All investors are risk-neutral, the risk-free rate is 4% and there are no taxes or other market imperfections. (a) What is the value of the company and its share price? Kappa decides to issue debt with face value $146 million due in one year and use the proceeds to repurchase shares now. Assume now that bankruptcy costs will be 15% of the value of the firm’s assets in the event of default on debt repayment. (b) What is the value of the debt now? What is its yield? (c) What is the expected value of the firm and the price per share? How many shares will be repurchased? (d) Assume Kappa decides instead to issue debt with face value $100 million due in one year and repurchase shares with the proceeds. What is the firm’s value now? Why? What is its share price? (e) Explain how the presence of corporate taxes would influence Kappa’s restructuring decision. (100 words)
Solutions
orchestra answered 2 years agoRelated Solutions
The firm Kappa has just decided to undertake a major new project. As a result, the...
The firm Kappa has just decided to undertake a major new
project. As a result, the value of the firm in one year’s time will
be either $120 million (probability 0.25), $250 million
(probability 0.5) or $360 million (probability 0.25). The firm is
financed entirely by equity and has 10 million shares. All
investors are risk-neutral, the risk-free rate is 4% and there are
no taxes or other market imperfections.
(a) What is the value of the company and its...
The firm Kappa has just decided to undertake a major new project. As a result, the...
The firm Kappa has just decided to undertake a major new
project. As a result, the value of the firm in one year’s time will
be either $120 million (probability 0.25), $250 million
(probability 0.5) or $360 million (probability 0.25). The firm is
financed entirely by equity and has 10 million shares. All
investors are risk-neutral, the risk-free rate is 4% and there are
no taxes or other market imperfections.
(a) What is the value of the company and its...
The firm Kappa has just decided to undertake a major new project. As a result, the...
The firm Kappa has just decided to undertake a major new
project. As a result, the value of the firm in one year’s time will
be either $120 million (probability 0.25), $250 million
(probability 0.5) or $360 million (probability 0.25). The firm is
financed entirely by equity and has 10 million shares. All
investors are risk-neutral, the risk-free rate is 4% and there are
no taxes or other market imperfections.
(a) What is the value of the company and its...
The firm Kappa has just decided to undertake a major new project. As a result, the...
The firm Kappa has just decided to undertake a major new
project. As a result, the value of the firm in one year’s time will
be either $120 million (probability 0.25), $250 million
(probability 0.5) or $360 million (probability 0.25). The firm is
financed entirely by equity and has 10 million shares. All
investors are risk-neutral, the risk-free rate is 4% and there are
no taxes or other market imperfections.
(a) What is the value of the company and its...
The firm Kappa has just decided to undertake a major new project. As a result, the...
The firm Kappa has just decided to undertake a major new
project. As a result, the value of the firm in one year’s time will
be either $120 million (probability 0.25), $250 million
(probability 0.5) or $360 million (probability 0.25). The firm is
financed entirely by equity and has 10 million shares. All
investors are risk-neutral, the risk-free rate is 4% and there are
no taxes or other market imperfections.
Kappa decides to issue debt with face value $146 million...
6. The firm Kappa has just decided to undertake a major new project. As a result,...
6.
The firm Kappa has just decided to undertake a major new
project. As a result, the value of the firm in one year’s time will
be either $120 million (probability 0.25), $250 million
(probability 0.5) or $360 million (probability 0.25). The firm is
financed entirely by equity and has 10 million shares. All
investors are risk-neutral, the risk-free rate is 4% and there are
no taxes or other market imperfections.
(a) What is the value of the company and...
The firm Jucol has just decided to undertake a major new project. As a result, the...
The firm Jucol has just decided to undertake a major new
project. As a result, the value of the firm in one year’s time will
be either $120 million (probability 0.25), $250 million
(probability 0.5) or $360 million (probability 0.25). The firm is
financed entirely by equity and has 10 million shares. All
investors are risk-neutral, the risk-free rate is 4% and there are
no taxes or other market imperfections.
(a) What is the value of the company and its...
Marcus Co., a U.S. company, has decided to undertake a 2-year project in Canada. The project...
Marcus Co., a U.S. company, has decided to undertake a 2-year
project in Canada. The project is expected to generate 18,000,000
Canadian dollars (C$) in the first year and C$40,000,000 in the
second. Marcus will need to invest $35,000,000 at the start of the
project. Marcus has decided to use a cost of capital of 14 percent,
which it uses for similar projects. The spot rate of the Canadian
dollar is expected to be $.79 for the first year and...
Your company is about to undertake a major investment project. The project will require an initial...
Your company is about to undertake a major investment project.
The project will require an initial outlay of $100 million for
fixed assets plus another $50 million for working capital. Tax
authorities will allow you to depreciate the fixed assets on a
straight-line basis over four years to a salvage value of zero. In
fact, however, you expect that you can sell the fixed assets for
$25 million at the end of Year 4. You also expect that you can...
PQ Recon Corporation has just paid a dividend of $1 per share. To undertake a project,...
PQ Recon Corporation has just paid a dividend of $1 per share.
To undertake a project, the company plans to reduce dividends to $0
for the next 3 years, after which dividends will grow (from its
current level) for 3 years at 30% per year, before settling down to
normal growth of 10% per year. If the company does not take on this
project, dividends will grow at the normal rate of 10%. Is it
worthwhile for this company to...
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