Southwest Airlines is an all-equity firm, with a perpetual EBIT of $153.85. The firm is considering...

Southwest Airlines is an all-equity firm, with a perpetual EBIT of $153.85. The firm is considering to issue $200 worth of debt with an interest rate of 10% and use the proceeds to buyback its shares. The tax rate is 35%.

Assume the firm has a current required return of 20% and all earnings are returned to shareholders as dividends after taxes.

What will the value of the airlines be after the debt issuance?

What is Southwest Airlines’ cost of equity after debt

issuance?

Is Southwest Airlines’ overall cost of capital higher or lower

after the debt issuance?

Solutions

Expert Solution

jeff jeffy answered 11 months ago

Next > < Previous

Related Solutions

Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $198,000 per year. The...

Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $198,000 per year. The cost of equity is 14.1 percent and the tax rate is 34 percent. The firm can borrow perpetual debt at 5.8 percent. Currently, the firm is considering converting to a debt–equity ratio of 1.08. What is the firm's levered value?

An all equity firm is expected to generate perpetual EBIT of $100 million per year forever....

An all equity firm is expected to generate perpetual EBIT of $100 million per year forever. The corporate tax rate is 35%. The firm has an unlevered (asset or EV) Beta of 0.8. The risk-free rate is 4% and the market risk premium is 6%. The number of outstanding shares is 10 million. 1. The firm decides to replace part of the equity financing with perpetual debt. The firm will issue $100 million of permanent debt at the riskless interest...

The Firm in Question is Southwest Airlines. The purpose of this assignment is to evaluate the...

The Firm in Question is Southwest Airlines. The purpose of this assignment is to evaluate the financial condition and performance of the firm you and your CLC group members have selected for analysis. Refer to Tables A-1 through A-5 in Appendix II of the text for the operational definitions of and formulas for numerous common financial ratios, including profitability, liquidity, leverage, activity, and shareholders' return. Using these formulas, complete at least one ratio from each of the five categories, though...

C&J Enterprises is an all-equity firm that is considering issuing $13.5 million of perpetual debt. The...

C&J Enterprises is an all-equity firm that is considering issuing $13.5 million of perpetual debt. The interest rate is 10%. The firm will use the proceeds of the bond sale to repurchase equity. The firm distributes all earnings available to stockholders immediately as dividends. The firm will generate $3 million of earnings before interest and taxes (EBIT) every year into perpetuity. The firm is subject to a corporate tax rate of 40%. Suppose the personal tax rate on interest income...

Consider an all-equity firm with 125,000 shares outstanding. Assume that EBIT=800,000 and that EBIT will remain...

Consider an all-equity firm with 125,000 shares outstanding. Assume that EBIT=800,000 and that EBIT will remain constant, the firm pays out all profits (EPS = dividends per share) as dividends, and that its tax rate is 40%. If the firm’s beta is 1.1, the risk-free rate is 4%, and the market risk premium is 6%, what is the firm’s stock price according to the dividend growth model? Round your answer to the nearest cent.

The Firm in Question is Southwest Airlines. The purpose is to evaluate the financial condition and...

The Firm in Question is Southwest Airlines. The purpose is to evaluate the financial condition and performance of the firm by analysis. In an assessment of approximately 250 words, address the following: The Organizational and Operational Plans assignment references the possible benefits and risks of forming a strategic alliance. What would be the risks of forming a strategic alliance in terms of the firm's profitability ratios? Which of those five ratios is most likely to reveal immediate information for analysis...

The Firm in Question is Southwest Airlines. The purpose is to evaluate the financial condition and...

The Firm in Question is Southwest Airlines. The purpose is to evaluate the financial condition and performance of the firm by analysis. In an assessment of approximately 250 words, address the following: Considering today's financial climate, how likely is it that the organization could acquire the capital necessary to support an aggressive value-enhancement strategy? From where would that capital originate? Compared to current interest rates, what do you believe is a realistic interest rate the firm might incur? Which of...

Floundering Fish Ltd. Is an all equity firm with EBIT of $950,000 per year which will...

Floundering Fish Ltd. Is an all equity firm with EBIT of $950,000 per year which will continue forever as the company pays out all earnings in the form of dividends. T-bills are currently yielding 2%; the market risk premium is 5%; the company’s tax rate is 40%; and costs of financial distress apply. Assume the market value of debt is equal to its book value. Beta of all equity firm is 0.85. What would be the value of the company...

GRK Co. is currently an all-equity firm with an expected return of 10%. The expected EBIT...

GRK Co. is currently an all-equity firm with an expected return of 10%. The expected EBIT is $ 50,000 forever. Assume that the firm distributes all the net income to the equity holders. The firm is considering a leveraged recapitalization in which it would borrow $ 250,000 and repurchase existing shares. The firm's tax rate is 40%. The cost of debt is 7%. 1/ Calculate the value of the firm with leverage. 2/ Calculate the expected return of equity after...

Lion Corp is an all equity firm. The firm's annual EBIT is currently $10 million and...

Lion Corp is an all equity firm. The firm's annual EBIT is currently $10 million and is expected to remain at that level indefinitely. The current expected return on Lion's stock is 20% and the firm pays corporate tax at the 35% rate. (a) Calculate the current value of Lion Corp. as an unlevered firm. (b) Suppose that Lion sells $10 million in debt and repurchases $10 million in equity. The debt they issue will offer a 10% interest rate....

Subjects