Question
In: Finance
Hardmon Enterprises is currently an all-equity firm with an expected return of 11.1%. It is considering...
Hardmon Enterprises is currently an all-equity firm with an expected return of 11.1%. It is considering a leveraged recapitalization in which it would borrow and repurchase existing shares. Assume perfect capital markets.
a. Suppose Hardmon borrows to the point that its debt-equity ratio is 0.50. With this amount of debt, the debt cost of capital is 4% What will be the expected return of equity after this transaction?
b. Suppose instead Hardmon borrows to the point that its debt-equity ratio is 1.50. With this amount of debt, Hardmon's debt will be much riskier. As a result, the debt cost of capital will be 6%. What will be the expected return of equity in this case?
c. A senior manager argues that it is in the best interest of the shareholders to choose the capital structure that leads to the highest expected return for the stock. How would you respond to this argument?
Solutions
jeff jeffy answered 1 day agoRelated Solutions
Hardmon Enterprises is currently an all-equity firm with an expected return of 12 %12%. It is...
Hardmon Enterprises is currently an all-equity firm with an
expected return of
12 %12%.
It is considering a leveraged recapitalization in which it would
borrow and repurchase existing shares. Assume perfect capital
markets.
a. Suppose Hardmon borrows to the point that
its debt-equity ratio is 0.50. With this amount of debt, the debt
cost of capital is
4 %4%.
What will the expected return of equity be after this
transaction?
b. Suppose instead Hardmon borrows to the point
that its...
5. Hardmon Enterprises is currently an all-equity firm with an expected return of 17.2% It is...
5. Hardmon Enterprises is currently an all-equity firm with an
expected return of 17.2% It is considering borrowing money to buy
back some of its existing shares. Assume perfect capital
markets.
a.Suppose Hardmon borrows to the point that its debt-equity
ratio is 0.50. With this amount of debt, the debt cost of capital
is 6%. What will be the expected return of equity after this
transaction?
b. Suppose instead Hardmon borrows to the point that its
debt-equity ratio is 1.50....
GRK Co. is currently an all-equity firm with an expected return of 10%. The expected EBIT...
GRK Co. is currently an all-equity firm with an expected return
of 10%. The expected EBIT is $ 50,000 forever. Assume that the firm
distributes all the net income to the equity holders. The firm is
considering a leveraged recapitalization in which it would borrow $
250,000 and repurchase existing shares. The firm's tax rate is 40%.
The cost of debt is 7%.
1/ Calculate the value of the firm with leverage.
2/ Calculate the expected return of equity after...
Edison is currently an all-equity firm with an expected return of 12%. Edison's firm value is...
Edison is
currently an all-equity firm with an expected return of 12%.
Edison's firm value is $500m. It is considering a leveraged
recapitalization in which it would borrow and repurchase existing
shares. Assume that there are no coporate taxes, no market
frictions and no bankruptcy costs. Make sure to read all questions
below (4 questions each worth 15 points)
Q1 (15 points)
Suppose
Edison wants to borrow to the point that its debt-equity ratio is
0.50. What is the value...
A firm is currently financed with $400 of debt and $600 of equity. The expected return...
A firm is currently financed with $400 of debt and $600 of
equity. The expected return on the debt is 5%. The market beta of
the firmʹs equity is 1.2; the risk -free rate is 2%; and the equity
premium is 6%. The firm pays taxes at the marginal rate of
40%. The firm is
considering increasing its debt to $600 and using the funds to
repurchase some of its stock. This is likely to change the expected
return on...
2) An all equity firm is considering the following projects: Project beta Expected Return W 0.75...
2) An all equity firm is considering the following projects:
Project beta Expected Return
W 0.75 10%
X 0.9 10.2
Y 1.2 12.0
Z 1.5 15
Assume that the firm has a overall cost of capital of 11%assume
that the T Bill is 5%, and the market return is 11 % expected
Which projects should be accepted?
Which projects will be incorrectly accepted or rejected if the
firm used its overall cost of capital as a hurdle rate?
Rockwood Enterprises is currently an all equity firm and has just announced plans to expand their...
Rockwood Enterprises is currently an all equity firm and has
just announced plans to expand their current business. In order to
fund this expansion, Rockwood will need toraise $100 million in new
capital. After the expansion, Rockwood is expected to produce
earnings before interest and taxes of $50 million per year in
perpetuity. Rockwood has already announced the planned expansion,
but has not yet determined how best to fund the expansion. Rockwood
currently has 16 million shares outstanding and following...
C&J Enterprises is an all-equity firm that is considering issuing $13.5 million of perpetual debt. The...
C&J Enterprises is an all-equity firm that is considering
issuing $13.5 million of perpetual debt. The interest rate is 10%.
The firm will use the proceeds of the bond sale to repurchase
equity. The firm distributes all earnings available to stockholders
immediately as dividends. The firm will generate $3 million of
earnings before interest and taxes (EBIT) every year into
perpetuity. The firm is subject to a corporate tax rate of 40%.
Suppose the personal tax rate on interest income...
Dyrdek Enterprises has equity with a market value of $11.1 million and the market value of...
Dyrdek Enterprises has equity with a market value of $11.1
million and the market value of debt is $3.70 million. The company
is evaluating a new project that has more risk than the firm. As a
result, the company will apply a risk adjustment factor of 1.9
percent. The new project will cost $2.26 million today and provide
annual cash flows of $591,000 for the next 6 years. The company's
cost of equity is 11.19 percent and the pretax cost...
Determine the expected return on equity for a firm with a WACC of 12%, $500,000 in...
Determine the expected return on equity for a firm with a WACC
of 12%, $500,000 in 9% debt, and $800,000 in equity. Both debt and
equity are shown at market values, and the firm pays no taxes. How
can the expected return on equity be reduced?
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