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 recapitalization.

3/ Calculate the cost of capital of the firm after recapitalization.

Expert Solution

jeff jeffy answered 1 year ago

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...

Omega Co. is an all-equity firm that is expected to generate EBIT of $8 million every...

Omega Co. is an all-equity firm that is expected to generate EBIT of $8 million every year forever. The company is now considering issuing debt with the amount of half the company's current value at a rate of 10%. There are currently 2 million shares outstanding. The proceeds will be used to repurchase equity. The firm's current cost of capital is 20% and corporate tax rate is 40%. 1. what is the current price per share? (before restructuring) 2. what...

Lion Corp is an all equity firm. The firm's annual EBIT is currently $10 million and...

Lion Corp is an all equity firm. The firm's annual EBIT is currently $10 million and is expected to remain at that level indefinitely. The current expected return on Lion's stock is 20% and the firm pays corporate tax at the 35% rate. (a) Calculate the current value of Lion Corp. as an unlevered firm. (b) Suppose that Lion sells $10 million in debt and repurchases $10 million in equity. The debt they issue will offer a 10% interest rate....

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...

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....

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...

An all equity firm is expected to generate perpetual EBIT of $100 million per year forever....

An all equity firm is expected to generate perpetual EBIT of $100 million per year forever. The corporate tax rate is 35%. The firm has an unlevered (asset or EV) Beta of 0.8. The risk-free rate is 4% and the market risk premium is 6%. The number of outstanding shares is 10 million. 1. The firm decides to replace part of the equity financing with perpetual debt. The firm will issue $100 million of permanent debt at the riskless interest...

An all-equity firm with 200,000 shares outstanding, has $2,000,000 of EBIT, which is expected to remain...

An all-equity firm with 200,000 shares outstanding, has $2,000,000 of EBIT, which is expected to remain constant in the future. The company pays out all of its earnings, so earnings per share (EPS) equals dividends per share (DPS). Its tax rate is 40%. The company is considering issuing $5,000,000 of 10% bonds and using the proceeds to repurchase stock. The risk free rate is 6.5%, the market risk premium is 5.0%, and the beta is currently 0.90, but the CFO...

Libby Co. is an unlevered firm. Investors currently expect a 12.75% return on the company’s equity....

Libby Co. is an unlevered firm. Investors currently expect a 12.75% return on the company’s equity. The company is subject to a 24% corporate tax rate. If earnings before taxes are expected to be $15.85m per year forever, calculate the total value of this company. Now suppose this company wants to shift its capital structure to add debt. It wants to issue $31.5 million of perpetual debt at a cost of 5.5%. Use the FTE method to calculate the value...

Question