Question

In: Finance

Crystal Inc. is currently an all equity firm with a market capitalization of 100 million dollars....

Crystal Inc. is currently an all equity firm with a market capitalization of 100 million dollars. It has a total of 10 million shares. The firm announces it will borrow 20 million dollars permanently to repurchase its shares. The capital market is not perfect: The corporate tax rate is 30%, personal tax rate on interest income is 20%, and personal tax rate on equity income is 10%.

a. What is the firm’s stock price before announcing the stock repurchase?

b. What is the effective tax advantage of debt?

c. What is the firm’s value after announcing the stock repurchase?

d. What is the firm’s stock price after announcing the stock repurchase?

e. What is the market value of the firm’s equity after the stock repurchase?

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

All-4-One is an all-equity firm with a market capitalization of $300 million. Its equity cost of...
All-4-One is an all-equity firm with a market capitalization of $300 million. Its equity cost of capital is 22.5%. Assume that there are no taxes or costs of financial distress, so the Modigliani-Miller Propositions hold. The company decides to issue $100 million in debt and use the proceeds to pay a special dividend to its shareholders. The cost of debt at the new capital structure will be 5%. What is the value of the firm after the change in capital...
Divido Corporation is an all-equity financed firm with a total market value of $100 million. The...
Divido Corporation is an all-equity financed firm with a total market value of $100 million. The company holds $10 million in cash equivalents and has $90 million in other assets. There are 1,000,000 shares of Divido common stock outstanding, each with a market price of $100. What would be the impact on Divido's stock price, market value, outstanding shares, and on the wealth of its shareholders? Of the payment of a cash dividend of $10 per share? If the company...
?Zelnor, Inc., is an? all-equity firm with 180 million shares outstanding currently trading for $ 11.52...
?Zelnor, Inc., is an? all-equity firm with 180 million shares outstanding currently trading for $ 11.52 per share. Suppose Zelnor decides to grant a total of 18 million new shares to employees as part of a new compensation plan. The firm argues that this new compensation plan will motivate employees and is better than giving salary bonuses because it will not cost the firm anything. Assume perfect capital markets. a. If the new compensation plan has no effect on the...
Currently, ABC Corp. has as market capitalization of $400 million and a market value of debt...
Currently, ABC Corp. has as market capitalization of $400 million and a market value of debt of $150 million. The current cost of equity for ABC Corp. is 12% and its current cost of debt is 5%. Assume perfect capital markets (no taxes, no market frictions). You are trying to assess how different transaction would affect the cost of equity. A) Suppose ABC issues $150 million of new equity and buys back the debt it currently has outstanding. What is...
Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 13 percent,...
Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 13 percent, and the risk-free rate is 4.1 percent. The company is currently considering a project that will cost $11.58 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.26 million.    If the company has a tax rate of 40 percent, what is the net present value of the project? (Enter...
Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 13 percent,...
Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 13 percent, and the risk-free rate is 4.3 percent. The company is currently considering a project that will cost $11.64 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.28 million. If the company has a tax rate of 35 percent, what is the net present value of the project?
Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 12 percent,...
Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 12 percent, and the risk-free rate is 4.8 percent. The company is currently considering a project that will cost $11.79 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.33 million.    If the company has a tax rate of 35 percent, what is the net present value of the project? (Enter...
Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 12 percent,...
Watson, Inc., is an all-equity firm. The cost of the company’s equity is currently 12 percent, and the risk-free rate is 4.8 percent. The company is currently considering a project that will cost $11.79 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.33 million.    If the company has a tax rate of 35 percent, what is the net present value of the project? (Enter...
Walker, Inc., is an all-equity firm. The cost of the company’s equity is currently 11.3 percent...
Walker, Inc., is an all-equity firm. The cost of the company’s equity is currently 11.3 percent and the risk-free rate is 4.2 percent. The company is currently considering a project that will cost $11.88 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.51 million. If the company has a tax rate of 21 percent, what is the net present value of the project? (Do not...
Walker, Inc., is an all-equity firm. The cost of the company’s equity is currently 11.6 percent...
Walker, Inc., is an all-equity firm. The cost of the company’s equity is currently 11.6 percent and the risk-free rate is 4.5 percent. The company is currently considering a project that will cost $11.97 million and last six years. The company uses straight-line depreciation. The project will generate revenues minus expenses each year in the amount of $3.57 million.    If the company has a tax rate of 24 percent, what is the net present value of the project?
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT