Question

In: Finance

Mason's Co currently has EBIT of $65,000 and is a zero growth company. It has $150,000...

Mason's Co currently has EBIT of $65,000 and is a zero growth company. It has $150,000 (book value) of perpetual debt outstanding carrying a coupon rate of 7% and a current market price of 101.2. Smith's current cost of equity is 9.3%, and its tax rate is 21%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. Please show all calculations.

a. What is Mason's current total market value and weighted average cost of capital?

b. The firm is considering moving to a capital structure that is comprised of 40% debt and 60% equity, based on market values. The new funds would be used to replace the old debt and to repurchase stock. It is estimated that the increase in risk resulting from the additional leverage would cause the required rate of return on debt to rise to 8.2%, while the required rate of return on equity would rise to 9.7%. If this plan were carried out, what would be Smith's new WACC and total value?

c. Now assume that Mason's is considering changing from its original capital structure to a new capital structure that results in a stock price of $62 per share. The resulting capital structure would have a $336,000 total market value of equity and a $504,000 market value of debt. How many shares would Mason's repurchase in the recapitalization? (Round to the nearest whole share.)

d. Now assume that Mason's is considering changing from its original capital structure to a new capital structure with 60% debt and 40% equity. If it makes this change, its resulting market value would be $720,000. What would be its new stock price per share?

Solutions

Expert Solution


Related Solutions

Smith’s HVAC currently has EBIT of $65,000 and is a zero growth company. It has $150,000...
Smith’s HVAC currently has EBIT of $65,000 and is a zero growth company. It has $150,000 (book value) of perpetual debt outstanding carrying a coupon rate of 7% and a current market price of 101.2. Smith's current cost of equity is 9.3%, and its tax rate is 21%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00. (Hint: Do not worry about calculating unlevered beta for this problem.) a. What is Smith's...
Martin Company has EBIT of $65,000 and is a zero growth company.  It has $150,000 (book value)...
Martin Company has EBIT of $65,000 and is a zero growth company.  It has $150,000 (book value) of perpetual debt outstanding carrying a coupon rate of 7% and a current market price of 101.2. Smith's current cost of equity is 9.3%, and its tax rate is 21%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $60.00.   What is the current total market value and weighted average cost of capital? The Martin company is...
The Kimberly Corporation is currently a zero growth firm with an expected EBIT of $100,000 and...
The Kimberly Corporation is currently a zero growth firm with an expected EBIT of $100,000 and zero debt financing, and the cost of equity to an unleveled firm in the same risk class is 16.0 percent. (a). No taxes are currently imposed on Kimberly’s earnings. What is the value of the        firm (VU )? (b) Now, assume that Kimberly still pays no taxes but now decides to use $500,000          of 12.0 percent debt financing. Write down (do not calculate)...
The Kimberly Corporation is currently a zero growth firm with an expected EBIT of $100,000 and...
The Kimberly Corporation is currently a zero growth firm with an expected EBIT of $100,000 and zero debt financing, and the cost of equity to an unleveled firm in the same risk class is 16.0 percent. (a). No taxes are currently imposed on Kimberly’s earnings. What is the value of the        firm (VU )? (b) Now, assume that Kimberly still pays no taxes but now decides to use $500,000          of 12.0 percent debt financing. Write down (do not calculate)...
Exhibit 16.1 CSUSM is a zero growth company. It currently has zero debt and its earnings...
Exhibit 16.1 CSUSM is a zero growth company. It currently has zero debt and its earnings before interest and taxes (EBIT) are $80,000. CSUSM 's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00. 11.Refer to Exhibit 16.1. CSUSM is considering changing its capital structure to one with 30% debt and 70% equity, based on market values. The debt would...
MacKinnon Co. currently has EBIT of $35,000 and is all equity financed. EBIT is expected to...
MacKinnon Co. currently has EBIT of $35,000 and is all equity financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 20% of taxable income. The cost of equity for this firm is 18%. Suppose the firm has a value of $155,555.56 when it is all equity financed. Now assume the firm issues $71,000 of debt paying interest of 8% per year and uses the proceeds to retire equity. The debt is expected...
Pennewell Publishing Inc. (PP) Pennewell Publishing Inc. (PP) is a zero growth company. It currently has...
Pennewell Publishing Inc. (PP) Pennewell Publishing Inc. (PP) is a zero growth company. It currently has zero debt and its earnings before interest and taxes (EBIT) are $80,000. PP's current cost of equity is 10%, and its tax rate is 25%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00. Refer to the data for Pennewell Publishing Inc. (PP). Assume that PP is considering changing from its original capital structure to a...
Young Corporation has an expected EBIT of $19,750 every year forever. The company currently has no...
Young Corporation has an expected EBIT of $19,750 every year forever. The company currently has no debt, and its cost of equity is 15 percent. a) What is the current value of the company? b) Suppose that the company can borrow at 10 percent. If the corporate tax rate is 35 percent what will the value of the firm be if the company takes on debt equal to 50 percent of its unlevered value? c) Calculate the cost of equity,...
Camouflage Corporation expects an EBIT of $26,850 every yearforever. The company currently has no debt,...
Camouflage Corporation expects an EBIT of $26,850 every year forever. The company currently has no debt, and its cost of equity is 14 percent. The tax rate is 35 percent.What is the current value of the company?Suppose the company can borrow at 8 percent. What will the value of the company be if it takes on debt equal to 50 percent of its unlevered value? What if it takes on debt equal to 100 percent of its unlevered value?What will...
Smoke and Mirrors currently has EBIT of $30,000 and is all-equity-financed. EBIT is expected to stay...
Smoke and Mirrors currently has EBIT of $30,000 and is all-equity-financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 32% of taxable income. The discount rate for the firm’s projects is 8%. a. What is the market value of the firm? (Round your answer to 2 decimal places.)   Market value of the firm   $ b. Now assume the firm issues $40,000 of debt paying interest of 6% per year and uses the...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT