Calculate the total firm value and market value of debt

Assignment Help Financial Management

Reference no: EM131328282

Assume that two firms, U and L, are identical, in all respects, except that Firm U is debt free, and Firm L has a capital structure that is 50 percent debt and 50 percent equity, by market value. Further suppose that the assumptions of the Modigliani and Miller capital structure irrelevance proposition hold (no taxes or transactions costs, no bankruptcy costs, etc.) and that each firm will have net operating income (EBIT) of $800,000.

If the required return on assets, r, for these firms is 12.5 percent, and risk-free debt yields 5 percent, calculate the following values for both Firm U and Firm L:

(1) total firm value,

(2) market value of debt and equity, and

(3) required return on equity.

Reference no: EM131328282

Questions Cloud

What happen to the required return on the companys stock : Using the proceeds to retire $10 million worth of equity, what would happen to the firm's WACC? What would happen to the required return on the company's stock?

What is the present value of check disbursement : Bulldog Inc. recently made a $75,000 purchase from a vendor. The vendor will accept payment by check or ACH. In either case, the vendor offers net trade credit terms of 30 days. Assuming a discount rate of 5%, what is the present value of an ACH disb..

Why the skills and training of project managers have change : Speculate on the main reasons why the skills and training of project managers have changed over time. Give your opinion as to whether these changes have been good for business. Provide a rationale for your response.

What is the firms debt to equity ratio : The required return on its outstanding debt is 6 percent, the required return on its shares is 14 percent, and its WACC is 10 percent. What is the firm's debt-to-equity ratio?

Calculate the total firm value and market value of debt : Calculate the total firm value, market value of debt and equity, and required return on equityfor both Firm U and Firm L.

What is your own decision-making style : How will you approach problem solving in the future based on what you have learned in this course? Describe your strategies and how you will apply them to future group work.

Research a topic in engineering that is foucs of ongoing : To identify, research, and present (in both written and oral formats) a topic in engineering that is currently the focus of ongoing (within the past 5 years) research, investigation, and/or development.The topic must come from the National Academy..

New payment terms are equivalent to existing payment terms : Which of the following will increase the NPV of switching from check to ACH disbursements? Which of the following refers to the disbursement philosophy that involves the use of present value techniques to determine whether new payment terms are equiv..

What is the bonds valuation and current yield : Bond 1 has a coupon rate of 0.0400, a face value of $10,000, for 20 years, pays dividends on a semi-annual basis, and a required yield (YTM) of 0.0350. What is the bonds valuation? What is the bond 1’s current yield?

User Account

All Pages