Bird Enterprises has no debt. Its current total value is $48 million. Assume debt proceeds are...

Bird Enterprises has no debt. Its current total value is $48 million. Assume debt proceeds are used to repurchase equity. a. Ignoring taxes, what will the company’s value be if it sells $18.9 million in debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, round your answer to the nearest whole number, e.g., 1,234,567.) b. Suppose now that the company’s tax rate is 25 percent. What will its overall value be if it sells $18.9 million in debt? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

Solutions

Expert Solution

a. Value of the firm = $48,000,000

With no taxes, the value of the levered firm is equal to the value of the unlevered firm.

b. Value of the firm = VU + TCD

Value of the firm = $48,000,000 + 0.25($18,900,000)

Value of the firm = $52,725,000

jeff jeffy answered 2 years ago

Next > < Previous

Related Solutions

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...

XYZ Company has a current market value of $1 million, half of which is debt. Its...

XYZ Company has a current market value of $1 million, half of which is debt. Its current WACC is 9%, and the tax rate is 40%. The firm is considering a new project which costs $500,000 that will be financed completely with debt and has the same operating risk as the firm’s existing projects. Finally, the project is expected to yield an after-tax rate of return of 8.5% per year. What is the appropriate cost of capital to use in...

River Enterprises has $500 million in debt and 1818 million shares of equity outstanding. Its excess...

River Enterprises has $500 million in debt and 1818 million shares of equity outstanding. Its excess cash reserves are $16 million. They are expected to generate $206 million in free cash flows next year with a growth rate of 22% per year in perpetuity. River Enterprises' cost of equity capital is 12%. After analyzing the company, you believe that the growth rate should be 33% instead of 22%. How much higher (in dollars) would the price per share be if...

Sora Industries has 63 million outstanding shares, $126 million in debt, $48 million in cash, and...

Sora Industries has 63 million outstanding shares, $126 million in debt, $48 million in cash, and the following projected free cash flow for the next four years: Year 0 1 2 3 4 Earnings and FCF Forecast ($ million) 1 Sales 433.0 468.0 516.0 547.0 574.3 2 Growth vs. Prior Year 8.1% 10.3% 6.0% 5.0% 3 Cost of Goods Sold (313.6) (345.7) (366.5) (384.8) 4 Gross Profit 154.4 170.3 180.5 189.5 5 Selling, General, & Admin. (93.6) (103.2) (109.4) (114.9)...

Sora Industries has 70 million outstanding shares, $124 million in debt, $48 million in cash, and...

Sora Industries has 70 million outstanding shares, $124 million in debt, $48 million in cash, and the following projected free cash flow for the next four years: Year 0 1 2 3 4 Copy to Clipboard + Open in Excel + Earnings and FCF Forecast ($ million) 1 Sales 433.0 468.0 516.0 547.0 574.3 2 Growth vs. Prior Year 8.1% 10.3% 6.0% 5.0% 3 Cost of Goods Sold (313.6) (345.7) (366.5) (384.8) 4 Gross Profit 154.4 170.3 180.5 189.5 5...

Assume JUP has debt with a book value of $23 ?million, trading at? 120% of par...

Assume JUP has debt with a book value of $23 ?million, trading at? 120% of par value. The firm has book equity of $27 ?million, and 2 million shares trading at $18 per share. What weights should JUP use in calculating its? WACC?

ABC Ltd., has a total market value of Rs.18 million. The debt of the company, which...

ABC Ltd., has a total market value of Rs.18 million. The debt of the company, which is composed of pure discount bonds, has a face value of Rs.8 million with a maturity of 5 years. The company’s standard deviation of return is 0.50 and the risk free rate of return is 10 percent. Required; Using the Black-scholes option valuation model, determine the market value of ABC ‘s equity capital. Market price of equity per share if share outstanding are...

a firm has total assets of 25 million TL. Its current assets is 10 million TL...

a firm has total assets of 25 million TL. Its current assets is 10 million TL and fixed assets (machinery, real estate etc) is 15 million TL. This firm’s financial leverage is %45. Firm has 1 500 000 total outstanding shares with 900 000 shares trading at the stock market and one share sells 10 TL in the stock market. What is the firm’s Price/Book ratio( PD/DD)? Calculate the expected stock price and market cap if the average Price/Book ratio...

Smith, Inc., has sales of $17.2 million, total assets of $16.1 million, and total debt of $7.5 million.

Smith, Inc., has sales of $17.2 million, total assets of $16.1 million, and total debt of $7.5 million. If the profit margin is 5%, what is net income? ROA? ROE? (10 Points)(Use Excel and Excel Formulas)

Company "Boats" Ltd. has no debt and its total market value is $ 2M. The profit...

Company "Boats" Ltd. has no debt and its total market value is $ 2M. The profit before interest and tax (EBIT) is expected to be either $50,000 during a recession, $150,000 during normal times, and $300,000 in an expansion period. "Boats" is considering issuing $500K debt at 4% interest. With the amount raised, the company intends to buy back shares from the public. There are currently 50,000 shares outstanding. Ignore taxes and assume that EPS is paid as a dividend...

Subjects