A firm which is unleveraged holds 1million shares priced at £80 each. The firm is looking...

A firm which is unleveraged holds 1million shares priced at £80 each. The firm is looking to change its capital structure by borrowing £50 million in debt and repurchasing shares. The loan contract stipulates that the firm will be required to pay off £10 million of its debt every year. Calculate the value of the restructured firm if the tax rate is 40% and the cost of debt is 8%.

Expert Solution

As per MM preposition If there is taxes, value of firm will be increased by present value of interest tax shield associated with New issued debt to repurchase Equity
Value of unlevered firm =share price * number of shares
80*1000000
80000000
Debt amount = $       50000000
Interest tax shield =loan balance at Beginning* interest rate *tax rate
Present value of interest tax shield = interest tax shield/*PVF
PVF = 1/(1+i)^n
i is Borrowing rate that is   8%
tax rate =   40%
n is year

jeff jeffy answered 1 year ago

Your company has earnings per share of $4. It has 1million shares outstanding, each of which...

Your company has earnings per share of $4. It has 1million shares outstanding, each of which has a price of $36. You are thinking of buying TargetCo, which has earnings per share of $1, 1million shares outstanding, and a price per share of $22. You will pay for TargetCo by issuing new shares. There are no expected synergies from the transaction. Suppose you offer an exchange ratio such that, at current pre-announcement share prices for both firms, the offer represents...

Your firm has 10 million shares outstanding currently priced at $40 a share. There is no...

Your firm has 10 million shares outstanding currently priced at $40 a share. There is no debt. The firm wishes to raise $15 million through a rights-issue with subscription price of $15. a) How many rights would be needed to buy a new share? b) What is the total value of the firm before and after the rights-issue? c) What is the total number of shares after rights-issue? d) What is the share price after the issue (the ex-rights price)?...

5 A. You own a portfolio that has 5,300 shares of stock A, which is priced...

5 A. You own a portfolio that has 5,300 shares of stock A, which is priced at 12.4 dollars per share and has an expected return of 13.6 percent, and 2,000 shares of stock B, which is priced at 22.5 dollars per share and has an expected return of 8.02 percent. The risk-free return is 2.54 percent and inflation is expected to be 1.95 percent. What is the risk premium for your portfolio? Answer as a rate in decimal format...

6/ A. You own a portfolio that has 4,100 shares of stock A, which is priced...

6/ A. You own a portfolio that has 4,100 shares of stock A, which is priced at 14.8 dollars per share and has an expected return of 4.97 percent, and 2,100 shares of stock B, which is priced at 24.9 dollars per share and has an expected return of 11.35 percent. The risk-free return is 3.14 percent and inflation is expected to be 2.41 percent. What is the expected real return for your portfolio? Answer as a rate in decimal...

You own a portfolio that has 6,600 shares of stock A, which is priced at 18...

You own a portfolio that has 6,600 shares of stock A, which is priced at 18 dollars per share and has an expected return of 7.42 percent, and 3,300 shares of stock B, which is priced at 20.2 dollars per share and has an expected return of 11.15 percent. The risk-free return is 3.57 percent and inflation is expected to be 1.94 percent. What is the expected real return for your portfolio? Answer as a rate in decimal format so...

A company has 2 million shares outstanding that are currently priced at $4 each and have...

A company has 2 million shares outstanding that are currently priced at $4 each and have a beta of 1.3. Five years ago the company issued bonds with a total face value of $3 million. One bond has a face value of $250,000. The bonds have a coupon rate of 3% p.a. and coupons are paid every six months. The bonds mature in fifteen years from today. The bonds currently yield 4% p.a., the market return is 7% p.a., the...

In 2011, a firm purchased a portfolio of marketable securities for $2,000, which it holds as...

In 2011, a firm purchased a portfolio of marketable securities for $2,000, which it holds as current assets. At the end of 2011, the portfolio had a market value of $1,600. During 2012, the firm sold some of the securities for $240 which had originally cost $200, but which had a market value of $180 at the end of 2011. At the end of 2012, the remaining securities had a market value of $2,300. a. Assume the firm treats its...

12-You own a portfolio that has 6,600 shares of stock A, which is priced at 18.4...

12-You own a portfolio that has 6,600 shares of stock A, which is priced at 18.4 dollars per share and has an expected return of 6.88 percent, and 1,400 shares of stock B, which is priced at 28.9 dollars per share and has an expected return of 15.14 percent. The risk-free return is 3.14 percent and inflation is expected to be 1.42 percent. What is the expected real return for your portfolio? Answer as a rate in decimal format so...

A shareholder currently owns 500 shares of Yesss, Co. Each share is currently priced at $15....

A shareholder currently owns 500 shares of Yesss, Co. Each share is currently priced at $15. The company has just released a rights offering at $12 plus 4 rights. What is the value of one right?

firm charges a fixed price of £80 for each shirt sold. The firm has a total...

firm charges a fixed price of £80 for each shirt sold. The firm has a total cost function: TC = Q3 – 136Q. (a) Write down the equation of the total revenue function. (b) Determine the break-even point.

Question