30. Trade-Off Theory. Smoke and Mirrors currently has EBIT of $25,000 and is all-equity- financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 21% of taxable income. The discount rate for the firm's projects is 10%. (LO16-3) a. What is the market value of the firm? b. Now assume the firm issues $50,000 of debt paying interest of 6% per year, using the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm (debt plus equity)? c. Recompute your answer to part (b) under the following assumptions: The debt issue raises the probability of bankruptcy. The firm has a 30% chance of going bankrupt after If it does go bankrupt, it will incur bankruptcy costs of $200,000. The discount 3 years. rate is 10%. d. Should the firm issue the debt under these new assumptions?

30. Trade-Off Theory. Smoke and Mirrors currently has EBIT of $25,000 and is all-equity- financed. EBIT is expected to stay at this level indefinitely. The firm pays corporate taxes equal to 21% of taxable income. The discount rate for the firm's projects is 10%. (LO16-3) a. What is the market value of the firm? b. Now assume the firm issues $50,000 of debt paying interest of 6% per year, using the proceeds to retire equity. The debt is expected to be permanent. What will happen to the total value of the firm (debt plus equity)? c. Recompute your answer to part (b) under the following assumptions: The debt issue raises the probability of bankruptcy. The firm has a 30% chance of going bankrupt after If it does go bankrupt, it will incur bankruptcy costs of $200,000. The discount 3 years. rate is 10%. d. Should the firm issue the debt under these new assumptions?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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criticism. structure? Explain M-M Theory with their 5 The Holland Company expects perpetual earnings before interest and taxes (EBIT) of $4 6 million per year. The firm's after-tax, all-equity discount rate (ro) is 15%. Holland is subject to a corporate tax rate of 35%. The pretax cost of the firm's debt capital is 10% per annum, and the firm has $10 million of debt in its capital structure. i. ii. iii. Question: 7 What is Holland's value? What is Holland's cost of equity (rs)? What is Holland's weighted average cost of capital (Twacc)?
Mf1. Please help answer this: Company XYZ is planning to repurchase part of its stock by issuing corporate debt. The firm’s debt-equity ratio will rise from 40% to 50 %. Currently, the firm has 50,000 debt outstanding. The cost of debt is 20% per year. The firm expects to have an EBIT of 25,000 per year in perpetuity. The firm XYZ pays no taxes. (You might need to use Modigliani-Miller Propositions to answer some of the questions.) a) What is the market value of firm XYZ before and after the stock repurchase? b) What is the expected return on the firm’s equity (ROE) before the announcement of the stock repurchase plan? c) What is the expected return on the equity of an identical all-equity firm? d) What is the expected return on the firm’s equity after the announcement of the stock repurchase plan?
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $183,000 per year. The cost of equity is 13.1 percent and the tax rate is 21 percent. The firm can borrow perpetual debt at 6.3 percent. Currently, the firm is considering converting to a debt–equity ratio of .93. What is the firm's levered value? MM assumptions hold. A. $829,786 B. $1,215,262 C. $1,155,579 D. $997,511 E. $921,985
Marcus Inc., a manufacturing firm with no debt outstanding and a market value of $100 million is considering borrowing $ 40 million and buying back stock. Assuming that the interest rate on the debt is 9% and that the firm faces a tax rate of 21%, answer the following question: Estimate the present value of all future interest tax savings, assuming that the debt change is permanent. Group of answer choices a. 21m b. 8.4m c. 0.756m d. 1.89m
Now, take the same firm, but put it in an environment where there is a 28% tax rate. h. What is the value of the unleveraged firm in the world with taxes and what will be the price of each equity share? i. Calculate each of the following for the unleveraged firm: ROA ROE • EPS • Cost of Equity (Rs) WACC Now add the $140 million in perpetual debt. j. What is the value of the leveraged firm in the world with taxes and what will be the price of each equity share? k. How many shares will be left outstanding after the change in capital structure this time 1. Calculate each of the following for the leveraged firm: • ROA ROE • EPS • Cost of Equity WACC m. Using Rs & Rb and the relevant annual CF to equity and debt, calculate the value of the Equity (S), the value of debt (B), and the value of the firm (V). n. Using WACC and the relevant annual CF to the firm, calculate the value of the firm (V).
Give typing answer with explanation and conclusion A company has an expected EBIT of $18,000 in perpetuity, a tax rate of 35%, and a debt-to- equity ratio of 0.75. The interest rate on the debt is 9.5%. The firm’s WACC is 9%. a) If the company has not debt, what would be the unlevered cost of capital and firm value? b) Suppose now the company has $55,714.29 in outstanding debt. Using your answer to part a) and M&M Proposition I with taxes, what is the value of this levered firm?
3. Toran plc. is an all-equity financed firm and generates earnings of £200 per year. Its current required rate of return on equity is 10% per annum. It is planning to issue corporate debt at a rate of 8% to achieve a debt-equity ratio of 50%. Toran plc. Assume that debt and earnings are perpetuities. What happens to the firm value after the debt issuance? Assume there are perfect capital markets. 100 0 200 0 250 0 400 0 450 0
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $195,000 per year. The cost of equity is 13.9 percent and the tax rate is 21 percent. The firm can borrow perpetual debt at 5.9 percent. Currently, the firm is considering converting to a debt–equity ratio of 1.05. What is the firm's levered value? MM assumptions hold. Multiple Choice $841,727 $1,092,192 $757,554 $927,952 $1,227,480
Stevenson's Bakery is an all-equity firm that has projected perpetual EBIT of $159,000 per year. The cost of equity is 11.5 percent and the tax rate is 21 percent. The firm can borrow perpetual debt at 6.3 percent. Currently, the firm is considering converting to a debt–equity ratio of .69. What is the firm's levered value? MM assumptions hold. Multiple Choice $1,185,911 $962,907 $898,696 $1,106,128 $808,826 Please answer fast i give upvote
Stevensons bakeries and all equity firm that has a projected perpetual EBIT of $144,000 per year. The cost of equity is 10.5% and the tax rate is 21%. Assume there's no depreciation, no capital spending and no change in networking capital. The firm can borrow perpetual debt at 5.8%. Currently, the firm is considering converting to a debt equity ratio of .54. What is the firms levered value? MM assumptions hold.
The current value of a firm is $1,400. Te firm has $1,000 in pure debt due in one year and the risk-free rate is 6%. The firm's asset will be worth either $1,200 or $1,500 in one year. What is the interest rate on the debt? A. 6.0% B. 7.0% C. 7.5% D. 11.0% E. 13.0%
An all-equity firm that has projected perpetual EBIT of $204,000 per year. The cost of equity is 14.5 percent and the tax rate is 39 percent. The firm can borrow perpetual debt at 5.6 percent. Currently, the firm is considering taking on debt equal to 114 percent of its unlevered value. What is the firm's levered value? $772,386 $858,207 $1,335,132 $1,048,986 $1,239,766

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