User Account

All Pages

Estimate the unlevered value of the firm

Assignment Help Business Management
Reference no: EM132742415

Omega Co would like to analyze its capital structure and assess whether it should add more debt to its capital. The current market value of debt of the firm is $800 million and the current market value of equity is $1,900 million. The firm has an EBIT of $140 million and faces a tax rate of 32%. The company's bonds are rated AA and the cost of debt is 5%. Currently, the firm has a probability of default of 2.5% and a bankruptcy cost which is 20% of the current value of the firm.

a. Estimate the unlevered value of the firm
b. Estimate the levered value of the firm, at a debt ratio of 40% of the current firm value. At that debt ratio, the firm's bond rating will be BBB, and the probability of default will increase to 38% while the bankruptcy cost will remain at 20% of the current firm value.
c. Should the firm change its debt ratio to 40%? Why or why not? In a few words, describe a capital restructuring strategy that the firm can use to achieve this new debt ratio.

Reference no: EM132742415

Questions Cloud

Difference between horizontal and vertical equity : Explain the relationship and difference between horizontal and vertical equity. Give examples of fiscal administration practices that meet the standards.
Calculate the payment after recasting the loan : You have taken out a $475,000, 5/1 ARM. The initial rate of 3.75% (annual) is locked in for 5 years. Calculate the payment after recasting the loan
Prepare the partnership statement of changes in equity : The partnership generated net income of P51,600 in 20x4. According to the partnership contract, Jaimie, Kristine and LAlly share profit and loss equally.
What are the implicit underlying assumption : What are the implicit underlying assumption(s) made by the analyst when producing such recommendation?
Estimate the unlevered value of the firm : Omega Co would like to analyze its capital structure and assess whether it should add more debt to its capital. The current market value of debt
Compute the profit per customer for the retail customer : Compute the profit (loss) per customer for the retail customer and business customer first using original cost system then using the ABC System.
What is the firm current debt-equity ratio : Rio Tinto Inc., which is a Canadian company and one of the global leaders in aluminum mining and production, is re-examining its capital structure
What is the company after-tax income using lifo : The company sold 379 units at $78 each and has a tax rate of 30%. Assuming that a periodic inventory system is used, and operating expenses of $2232.
What should the owner of the company do : A company has always depreciated assets using the straight-line method. The tax accountant for the company has explained that a switch to the double-declining.

Reviews

Write a Review

Business Management Questions & Answers

  Caselet on michael porter’s value chain management

The assignment in management is a two part assignment dealing 1.Theory of function of management. 2. Operations and Controlling.

  Mountain man brewing company

Mountain Man Brewing, a family owned business where Chris Prangel, the son of the president joins. Due to increase in the preference for light beer drinkers, Chris Prangel wants to introduce light beer version in Mountain Man. An analysis into the la..

  Mountain man brewing company

Mountain Man Brewing, a family owned business where Chris Prangel, the son of the president joins. An analysis into the launch of Mountain Man Light over the present Mountain Man Lager.

  Analysis of the case using the doing ethics technique

Analysis of the case using the Doing Ethics Technique (DET). Analysis of the ethical issue(s) from the perspective of an ICT professional, using the ACS Code of  Conduct and properly relating clauses from the ACS Code of Conduct to the ethical issue.

  Affiliations and partnerships

Affiliations and partnerships are frequently used to reach a larger local audience? Which options stand to avail for the Hotel manager and what problems do these pose.

  Innovation-friendly regulations

What influence (if any) can organizations exercise to encourage ‘innovation-friendly' regulations?

  Effect of regional and corporate cultural issues

Present your findings as a group powerpoint with an audio file. In addition individually write up your own conclusions as to the effects of regional cultural issues on the corporate organisational culture of this multinational company as it conducts ..

  Structure of business plan

This assignment shows a structure of business plan. The task is to write a business plane about a Diet Shop.

  Identify the purposes of different types of organisations

Identify the purposes of different types of organisations.

  Entrepreneur case study for analysis

Entrepreneur Case Study for Analysis. Analyze Robin Wolaner's suitability to be an entrepreneur

  Forecasting and business analysis

This problem requires you to apply your cross-sectional analysis skills to a real cross-sectional data set with the goal of answering a specific research question.

  Educational instructional leadership

Prepare a major handout on the key principles of instructional leadership

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd