Reference no: EM133071782
Student Name: Section: Assignment 1: Introduction to ValuationXanadu Monetary Corp. (XMC) is a company based in the small island country of Baldavia. There has been a recent change in Baldavia's tax laws. The parliament of Baldavia has decided to revolutionize its capital markets and raise the corporate income tax rate from 0% to 40% in 2022. The personal income tax rate will remain unchanged at 0%. XMC has perpetual annual operating income of $50,000,000 per year starting in 2022, assets that do not depreciate, and perpetual annual capital expenditures of $10,000,000. XMC is currently 100% equity financed, and shareholders expect a rate of return of 10%. In light of the new law raising the corporate tax rate, XMC is considering issuing $100,000,000 in new bonds at par value to fund a one-time special dividend of $100,000,000. The debt issuance and special dividend would occur now in 2021. Companies of similar credit standing to that of XMC are issuing bonds at a yield to maturity of 5%.
1. What is XMC's total perpetual dividend starting in 2022 without the debt issuance?
2. Calculate the value of XMC before the debt issuance.
3. Compute XMC's firm value at the time of the debt issuance and dividend announcement (cum dividend) using the adjusted present value (APV) approach.
4. Using the WACC approach to firm valuation and the new firm value in part 3), solve for the WACC, rWACC. Recall that with the WACC approach to valuation, VL = FCF/rWACC.
5. With the WACC value calculated in part 4) and the cost of debt, use the WACC formula to solve for the cost of equity, rE.
6. After going ahead with the debt issuance and special dividend, what is XMC's total perpetual dividend starting in 2022?
7. Using the cost of equity capital calculated in part 5) and the perpetual dividend calculated in part 6), compute XMC's equity value as of 2021 just after the payout (i.e., ex dividend, excluding the $100M special dividend investors will receive) using the cash flow to equity (CFTE) approach.
8. Finally, compute XMC's firm value at the time of the announcement (cum dividend)