(SHOW CALCULATIONS PLEASE) Unlevered Corporation (Firm U) has a total market value of $15,000,000, a tax...

(SHOW CALCULATIONS PLEASE) Unlevered Corporation (Firm U) has a total market value of $15,000,000, a tax rate of 40 percent, and earnings before interest and taxes (EBIT) of $2,000,000. Levered Corporation (Firm L) is identical in all respects to Firm U, but Firm L has $13,000,000 market (and book) value of debt outstanding. Firm L pays total annual interest of $1,040,000 on this debt. Both firms satisfy the MM assumptions. Now answer next 4 questions.

a. What is the value of Firm L according to MM’s Proposition I with corporate taxes?

b. What is Firm U’s cost of equity?

c. What is Firm L’s cost of equity?

d. What is Firm L’s weighted average cost of capital?

Solutions

Expert Solution

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Greenwich Company is an unlevered firm with a total market value of $25,600,000 with 1,200,000 shares...

Greenwich Company is an unlevered firm with a total market value of $25,600,000 with 1,200,000 shares of stock outstanding. The firm has expected EBIT of $1,800,000 if the economy is normal and $2,650,000 if the economy booms. The firm is considering a $5,000,000 bond issue with an attached interest rate of 6.2 percent. The bond proceeds will be used to repurchase shares. Ignore taxes. What will the earnings per share be after the repurchase if the economy booms? $2.30 $2.67...

Firms U and A are similar except that firm U is unlevered, while firm A is...

Firms U and A are similar except that firm U is unlevered, while firm A is a levered and has 5% Debt of 20% in its total capital structure amount of OMR 1,000,000. Assume that the corporate tax rate is 40%; net operating income is 20% of total fixed assets and the cost of equity of unlevered firm is 10%. Total fixed assets amount OMR 700,000. As finance student, by following Modigliani-Miller Approach estimate the value of the unlevered firm...

Currently the firm has total market value of debt $20 million and total market value of...

Currently the firm has total market value of debt $20 million and total market value of equity $60 million. This capital structure is considered optimal by the management. The optimal capital budget for new investment for the coming period is determined to be $15 million. The total net income is estimated to be $20 million. The firm has 5 million common shares outstanding. The most recent dividend per share is $1 and the management intends to maintain it for the...

Project financing Suppose an unlevered firm has a perpetual cash flow and market value of EBIT...

Project financing Suppose an unlevered firm has a perpetual cash flow and market value of EBIT = 100 E = 1000 The number of outstanding shares is, N0 = 500 The firm considers investing in a project that costs $300 and returns a perpetual cash flow of $40. Cost, C0 = 300 Cash flow, X = 40 Should the company invest in this project? Now suppose the company will invest in this project. If the company issues equity to fund...

An unlevered firm has a value of $900 million. An otherwise identical but levered firm has...

An unlevered firm has a value of $900 million. An otherwise identical but levered firm has $70 million in debt at a 4% interest rate, which is its pre-tax cost of debt. Its unlevered cost of equity is 11%. After Year 1, free cash flows and tax savings are expected to grow at a constant rate of 3%. Assuming the corporate tax rate is 25%, use the compressed adjusted present value model to determine the value of the levered firm....

An unlevered firm with a share price of $80, market value of $8 million, and 100,000...

An unlevered firm with a share price of $80, market value of $8 million, and 100,000 shares outstanding announces that $5 million of perpetual debt will be issued and the proceeds will be used to repurchase an equal value of equity shares. The firm's tax rate is 40%. How many shares will be repurchased?" 50000 62500 40000 60000 45500

3. A firm is initially unlevered and the market value of its equity is $800 million....

3. A firm is initially unlevered and the market value of its equity is $800 million. The firm is planning to issue $250 million of perpetual debt and repurchase equity of an equal amount. The corporate tax rate is 20%. Assume that there are no costs of financial distress and that the discount rate for the interest tax shields is equal to the cost of debt. Remarks: i. Assume the EBIT each year will be high enough so the 30...

An all-equity firm is subject to a 30% corporate tax rate. Its total market value is...

An all-equity firm is subject to a 30% corporate tax rate. Its total market value is initially $3,500,000. There are 175000 shares outstanding. It announces that it will issue $1 million of bonds at 10% interest and uses the proceeds to buy back common stock (Assume no change in costs of financial distress) a. what will happen to the market value of equity at the announcement of the share repurchase? b. How many shares can the firm buy back with...

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...

Assume the following data for two firms (U = unlevered firm) and (L = levered firm)....

Assume the following data for two firms (U = unlevered firm) and (L = levered firm). Assume the two firms are in the same risk class when it comes to business risk. Both firms have EBIT = €1000 000. Firm U has zero debt and its required rate of return (KsU = 12%). Firm L has €2000 000 debt and pays 10% interest rate. Based on the data provided, answer the following questions and show all your computations and interpret...

Subjects