Question

In: Finance

A firm with no debt-financed financial leverage has 600,000 common shares trading at $30 per share....

A firm with no debt-financed financial leverage has 600,000 common shares trading at $30 per share. With its investment plan fixed, it is expected to generate a perpetual EBIT stream of $3 million per year. The corporate tax rate is 40%. The firm is contemplating issuing a $9 million face value perpetual bond carrying 5% coupon interest per year and using the proceeds to retire some of its stock outstanding. Ignoring personal taxes:

Suppose investors are subject to 20% personal tax rate on dividend income and personal 40% tax rate on interest income. Based on this information and the information in Problem 1:

a. What will be the market value of the firm’s equity after the change in its capital structure?

b. What will be the share price after the change in firm’s capital structure?

c. What will be the firm’s WACC after the change in its capital structure?

Solutions

Expert Solution

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

jeff jeffy answered 1 year ago
Next > < Previous

Related Solutions

A firm with no debt-financed financial leverage has 600,000 common shares trading at $30 per share....
A firm with no debt-financed financial leverage has 600,000 common shares trading at $30 per share. With its investment plan fixed, it is expected to generate a perpetual EBIT stream of $3 million per year. The corporate tax rate is 40%. The firm is contemplating issuing a $9 million face value perpetual bond carrying 5% coupon interest per year and using the proceeds to retire some of its stock outstanding. Ignoring personal taxes. Suppose investors are subject to 20% personal...
A firm with no debt-financed financial leverage has 600,000 common shares trading at $30 per share....
A firm with no debt-financed financial leverage has 600,000 common shares trading at $30 per share. With its investment plan fixed, it is expected to generate a perpetual EBIT stream of $3 million per year. The corporate tax rate is 40%. The firm is contemplating issuing a $9 million face value perpetual bond carrying 5% coupon interest per year and using the proceeds to retire some of its stock outstanding. Ignoring personal taxes: a. What will be the value of...
A firm with a return on common equity (ROCE) of 30% has financial leverage of 37.5%...
A firm with a return on common equity (ROCE) of 30% has financial leverage of 37.5% and a net after-tax borrowing cost of 5% on $240 million of net debt The firm is considering repurchasing $150 million of its stock and financing the repurchase with further borrowing at a 5% after-tax borrowing cost. What effect will this transaction have on the firm’s return on common equity if the same level of operating profitability is maintained? Will this repurchase change the...
Randy Company has 600,000 shares of common stock outstanding. Each share of common stock has a...
Randy Company has 600,000 shares of common stock outstanding. Each share of common stock has a par value of $10. Please prepare journal entries to record the following INDEPENDENT transactions: 1. Randy’s directors declare a 10% stock dividend on September 1, 2019. On that date, the stock is trading on the market at $30 per share. 2. Randy purchases 1,000 of its outstanding shares on January 10, 2019 for $20 per share. 3. On April 1, 2019, Randy reissues 2,000...
Randy Company has 600,000 shares of common stock outstanding. Each share of common stock has a...
Randy Company has 600,000 shares of common stock outstanding. Each share of common stock has a par value of $10. Please prepare journal entries to record the following INDEPENDENT transactions: 1. Randy’s directors declare a 10% stock dividend on September 1, 2019. On that date, the stock is trading on the market at $30 per share. 2. Randy purchases 1,000 of its outstanding shares on January 10, 2019 for $20 per share. 3. On April 1, 2019, Randy reissues 2,000...
"The Bold and Beautiful company has 5 million shares outstanding, now trading at £30 per share. The firm has estimated the expected rate of return
"The Bold and Beautiful company has 5 million shares outstanding, now trading at £30 per share. The firm has estimated the expected rate of return to equity at 8%. It has also issued long-term debt securities at an interest rate of 6%. Assume that this firm has issued a £100 million bond.a. What is firm's WACC?b. If the firm pays tax at a marginal rate of 30%, what is its after-tax WACC? c. Briefly discuss the Modigliani-Miller propositions with regard...
ABC Corporation has 12 million shares outstanding, now trading at 65£ per share. The firm has...
ABC Corporation has 12 million shares outstanding, now trading at 65£ per share. The firm has estimated the expected rate of return to shareholders at about 15%. It has also issued 5-year bonds of 400 million at an interest rate of 8%. It pays tax at a marginal rate of 35%. What is ABC’s after-tax WACC? Compute the present value of interest tax shields generated by the 5-year bonds A customer has ordered goods from ABC generating a present value...
Omega Corporation has 10.9 million shares outstanding, now trading at $64 per share. The firm has...
Omega Corporation has 10.9 million shares outstanding, now trading at $64 per share. The firm has estimated the expected rate of return to shareholders at about 15%. It has also issued long-term bonds at an interest rate of 6%. It pays tax at a marginal rate of 34%. Assume a $245 million debt issuance. a. What is Omega’s after-tax WACC? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Omega’s after-tax WACC % b. How much higher...
Omega Corporation has 11.7 million shares outstanding, now trading at $48 per share. The firm has...
Omega Corporation has 11.7 million shares outstanding, now trading at $48 per share. The firm has estimated the expected rate of return to shareholders at about 10%. It has also issued $165 million of long-term bonds at an interest rate of 9%. It pays tax at a marginal rate of 34%. a. What is Omega’s after-tax WACC? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places.) After-tax WACC = _______% b. What would...
Firm AAA’s stock is currently trading at $2 per share. The Total Shares Outstanding of Firm...
Firm AAA’s stock is currently trading at $2 per share. The Total Shares Outstanding of Firm AAA is 3 billion. Based on this information is this a Mid-Cap firm, Micro-Cap firm, Large Cap firm, or small cap firm? Firm DDD has Current Assets = $50 and Current Liabilities = $100. Which of the following is the correct Current Ratio of this firm? a. 0.5    b. 0.005        c. 1          d. 2 Which of the following financial ratio is forward-looking: (I) Asset...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT