Swedish Wood Corp. currently has no debt. Its market capitalization is $700 million, and its average...

Swedish Wood Corp. currently has no debt. Its market capitalization is $700 million, and its average tax rate is 34%.

The company wants to borrow $245 million to repurchase shares. The debt will have an interest rate of 5.2% and will be kept constant forever.

Part 1: What is the annual interest tax shield (in $ million)?

Part 2: What is the present value of all future annual interest tax shields (in $ million)?

Part 3: What is the new value of the firm (in $ million)?

Part 4: What is the new market value of equity (in $ million)?

Part 5: What will be the debt/equity ratio after the restructuring?

Solutions

Expert Solution

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

NO ROUNDING CONDITIONS ARE MENTIONED, SO TAX SHIELD ROUNDED TO 4 DECIMALS,

DEBT EQUITY RATIO ROUNDED TO 4 DEDIMALS AND ALSO IN % TERMS, ROUNDED TO 2 DECIMALS

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

Currently, ABC Corp. has as market capitalization of $400 million and a market value of debt...

Currently, ABC Corp. has as market capitalization of $400 million and a market value of debt of $150 million. The current cost of equity for ABC Corp. is 12% and its current cost of debt is 5%. Assume perfect capital markets (no taxes, no market frictions). You are trying to assess how different transaction would affect the cost of equity. A) Suppose ABC issues $150 million of new equity and buys back the debt it currently has outstanding. What is...

Alpha Corp is a mature firm in the manufacturing sector and currently has a market capitalization...

Alpha Corp is a mature firm in the manufacturing sector and currently has a market capitalization of $ 500 million with 100 million shares outstanding. The firm has an annual cash flow earnings of $60 million and its cost of capital is 12%. Alpha Corp is considering taking over Beta Corp which has done reasonably well in the recent past. Beta Corp currently has 10 million shares outstanding with a market capitalization of $ 20 million and annual cash flow...

Acme Storage has a market capitalization of $111 million, and debt outstanding of $159 million. Acme...

Acme Storage has a market capitalization of $111 million, and debt outstanding of $159 million. Acme plans to maintain this same debt-equity ratio in the future. The firm pays an interest of 6.7% on its debt and has a corporate tax rate of 35%. a. If Acme's free cash flow is expected to be $10.80 million next year and is expected to grow at a rate of 6% per year, what is Acme's WACC? b. What is the value of...

MNO Corp. has a market capitalization of $13,500,000 and has 500,000 shares outstanding. MNO currently pays...

MNO Corp. has a market capitalization of $13,500,000 and has 500,000 shares outstanding. MNO currently pays a $2 per-share dividend. Bob currently owns 100 shares of MNO. Answer the following questions. Assume no taxes. a. What is the value of Bob’s investment after the dividend is paid (ie cash from the dividend plus share value)? Keep in mind the share price change after the dividend is paid. b. Bob would prefer to receive a $1 per-share dividend. Show how Bob...

Crystal Inc. is currently an all equity firm with a market capitalization of 100 million dollars....

Crystal Inc. is currently an all equity firm with a market capitalization of 100 million dollars. It has a total of 10 million shares. The firm announces it will borrow 20 million dollars permanently to repurchase its shares. The capital market is not perfect: The corporate tax rate is 30%, personal tax rate on interest income is 20%, and personal tax rate on equity income is 10%. a. What is the firm’s stock price before announcing the stock repurchase? b....

Currently the firm has total market value of debt $20 million and total market value of...

Currently the firm has total market value of debt $20 million and total market value of equity $60 million. This capital structure is considered optimal by the management. The optimal capital budget for new investment for the coming period is determined to be $15 million. The total net income is estimated to be $20 million. The firm has 5 million common shares outstanding. The most recent dividend per share is $1 and the management intends to maintain it for the...

ABC Corp. debt is P15 million and has an equity of P5 million. Its historical levered...

ABC Corp. debt is P15 million and has an equity of P5 million. Its historical levered equity beta has been 2. If the firm were to increase its leverage from P15 million to P18 million and use the cash to repurchase shares, what would you expect its levered equity beta to be

(i) Boral currently has $400 million market value of debt outstanding. This debt was contracted five...

(i) Boral currently has $400 million market value of debt outstanding. This debt was contracted five years ago at the rate of 4%. Boral can refinance 60% of the debt at 5% with the remaining 40% refinanced at 6.5%. The company also has an issue of 6 million preference shares outstanding with a market price of $20 per share. The preference shares offer an annual dividend of $1.5 per share. Boral also has 10 million ordinary shares outstanding with a...

(i) Boral currently has $400 million market value of debt outstanding. This debt was contracted five...

(i) Boral currently has $400 million market value of debt outstanding. This debt was contracted five years ago at the rate of 4%. Boral can refinance 60% of the debt at 5% with the remaining 40% refinanced at 6.5%. The company also has an issue of 2 million preference shares outstanding with a market price of $20 per share. The preference shares offer an annual dividend of $1.5 per share. Boral also has 14 million ordinary shares outstanding with a...

(i) Boral currently has $400 million market value of debt outstanding. This debt was contracted five...

Subjects