Consider a world with no taxes and perfect capital markets. The WW Corporation is currently all...

Consider a world with no taxes and perfect capital markets. The WW Corporation is currently all equity financed. Its earnings are $10M per year and will stay that way in perpetuity. The value of the firm is $120M. The firm is considering issuing risk-free debt worth $50M and maturing in 10 years at an interest rate of 6% and using it to repurchase $50M of equity. Ivan owns $1.5M of the stock of WW before the refinancing. By how much would his total lending or borrowing change when the firm refinances assuming he wants the same returns both before and after?

a. 1.5M b. 0.375M c. 0.875M d. 0.625M

Solutions

Expert Solution

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

ANSWER : d : 0.625M

I HAVE ALSO SHOWN THAT HE GOT SAME CASH FLOW BY SELLING 0.625 M SHARES

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

(10) This is a world with NO TAXES (perfect capital markets). The firm is a no...

(10) This is a world with NO TAXES (perfect capital markets). The firm is a no growth firm and pays out all of its earnings as dividends. It is originally all equity financed (unlevered). The firm decides to issue $500,000 in debt to repurchase stock. The cost of debt is 4%. Fill in ALL the missing values in the table. Unlevered Levered EBIT 200,000 200,000 INTEREST Earnings (Net Income) #Shares 20,000 Ru 8% 8% RE EPS Price Value of the...

The TQM Corporation is located in a country where there are perfect capital markets and no...

The TQM Corporation is located in a country where there are perfect capital markets and no taxes.... The TQM Corporation is located in a country where there are perfect capital markets and no taxes. The corporation currently has $120 million in equity and $60 million in risk free debt. The return on equity, rS, is 18% and the cost of debt, rB, is 9%. Suppose TQM decides to issue additional equity to repurchase the $60 million in debt so that...

15. In the MM perfect markets world, consider a firm with a single project that will...

15. In the MM perfect markets world, consider a firm with a single project that will worth either $100 or $200 in one year with equal probability. If the firm issues debt with a face value (promised payment) of $55(LD firm). The appropriate discount rate for the project is 10%. What is the value of the firm’s equity? What is the value of the equity if the firm were to issue debt with a face value of $110 (HD firm)?...

In the MM perfect markets world, consider a firm with a single project that will worth...

In the MM perfect markets world, consider a firm with a single project that will worth either $100 or $200 in one year with equal probability. If the firm issues debt with a face value (promised payment) of $55(LD firm). The appropriate discount rate for the project is 10%. What is the value of the firm’s equity? What is the value of the equity if the firm were to issue debt with a face value of $110 (HD firm)? How...

Under the M&M world with perfect capital markets, the cost of equity is independent of its...

Under the M&M world with perfect capital markets, the cost of equity is independent of its capital structure. True False Under the M&M world with perfect capital markets, a firm’s value should rise with increased leverage because debt is cheaper than equity. True False Under the M&M world with perfect capital markets, a firm’s average cost of capital (i.e. pre-tax WACC) falls for increases in debt as long as the firm avoids truly excessive leverage. True False

For this exercise, we assume that there are no taxes and financial markets are perfect. The...

For this exercise, we assume that there are no taxes and financial markets are perfect. The ideal bank's interest rate (EAR) is 8% per year for all maturities. Company X owns one apartment building and has no other assets. Company X is 100% equity-financed;_ its revenue comes entirely from rental revenue of apartments it owns. We also assume that there are no cash costs, no depreciations, no investments, no working capital, therefore we have: rental revenue=EBIT=net income=free cash flow. Company...

Suppose that capital markets are perfect, meaning that they are complete, efficient and there are no...

Suppose that capital markets are perfect, meaning that they are complete, efficient and there are no frictions such as taxes. AH Belo Corp currently is 100% equity financed, with a market capitalization of $1 billion but has decided to add some debt to its capital structure. It will do so by raising $100 million in debt and using the proceeds to repurchase shares. Which of the following accurately describes the effect of this policy change on the company's stock price?...

“Modigliani and Miller (MM) suggested that in a perfect world with no taxes or bankruptcy cost,...

“Modigliani and Miller (MM) suggested that in a perfect world with no taxes or bankruptcy cost, the dividend policy is irrelevant. They proposed that the dividend policy of a company has no effect on the stock price of a company or the company’s capital structure.” (Ani 2016) Based on the above statement you are required write an essay on dividend irrelevance and capital structure theories that has been originally advanced by Franco Modigliani and Merton H. Miller (Modigliani and Miller...

Consider a world of corporate taxes along with personal taxes on income from shares and on...

Consider a world of corporate taxes along with personal taxes on income from shares and on income from bonds. (i) Prove that the gain from leverage is less than the gain without personal taxes. (ii) With appropriate tax rates, is it possible that the gain could be negative? If so, provide a numerical example.

In the absence of taxes and perfect capital market assumptions what conclusions did Modigliani and Miller...

In the absence of taxes and perfect capital market assumptions what conclusions did Modigliani and Miller make about the relevance of the capital structure decision? Use numerical examples to support your answer.

Subjects