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Calculate the value of the firm

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Malone Machinery Limited has an EBIT of $500,000. The firm has a corporate tax rate of 40% and has an un-levered beta of .85. The firm has 110,000 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 3% and the S&P/TSX Composite Index is expected to yield 12%. Assume a world of taxes and a cost for the risk of default. All general M&M assumptions apply.

a) Calculate the value of the firm. 

b) Calculate the WACC for the firm. 

c) What is the value of a share in the company and what is the EPS? 

d) What is the value of the firm if the firm issues $500,000 of bonds at par with a coupon rate of 7.5%? The beta for the equity of the leveraged firm is .98. 

e) What is the value of the firm if the firm issues $700,000 of bonds at par with a coupon rate of 8.5%? The beta for the equity of the leveraged firm is 1.25. 

f) What is the optimal level of debt $0, $500,000 or $700,000? Explain.

g) What is the WACC for the firm at the optimal level of debt?

Reference no: EM132411032

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