Reference no: EM132654764
Midcap Corporation (MC) will cease to operate in one year. The ?rm is currently all-equity ?nanced, and has 10 million shares outstanding. In one year, MC's projects will generate earnings before interest and taxes of$90 million, $180 million or $225 million with equal probabilities (in the Bad, Medium and Good states respectively). Assume that the physical assets are completely worthless in all three states of the world at that time. The risk is all idiosyncratic, and so all cash ?ows can be discounted at the same risk free rate of 20%. The corporate tax rate is 20%.
The ?rm is considering a debt issue whose proceeds will be used to repurchase some of its equity. Two sizes are being considered for this one-year debt contract: a promised payment of$60 million or a promised payment of$120 million. If MC defaults on its debt, it is anticipated that 80% of the available money will be lost to bankruptcy frictions (e.g., legal costs). To simplify calculations, assume that the entire payment on the debt (not just the interest payment) is tax deductible.
(1) Suppose that MC Chooses the debt with the $60 million promised payment. After the debt issue and equity repurchase, what is the value of the debt, the value of the equity, and the total value of the ?rm? Also, what is the price per share, and how many shares are repurchased?
(2) Suppose instead that MC chooses the debt with the $120 million promised payment. After the debt issue and equity repurchase, what is the value of the debt, the value of the equity, and the total value of the ?rm? Also, what is the price per share, and how many shares are repurchased?
(3) What is the optimal ?nancing of the ?rm (no debt, debt with a $60 million face value, or debt with a $120 million face value)? Intuitively explain why .
|
Terrorism and homeland security the ninth edition
: Define the Middle East according to Bernard Lewis. Describe the Middle East Terrorism profile. Provide a profile of Mohammed and his teachings.
|
|
Find the initial amount of? debt
: Backcountry Adventures is a? Colorado-based outdoor travel agent that operates a series of backcountry huts
|
|
Did the business have a net loss of that month
: A business's February income statement showed an income of $17,500, Did the business have a net loss of $8,000 that month
|
|
Should garrett accept schoenen proposal
: Should Garrett accept Schoenen's proposal? Explain. Garrett Manufacturing sold 410,000 units of its product for $68 per unit in 2017.
|
|
Optimal ?nancing of the ?rm-midcap corporation
: Midcap Corporation (MC) will cease to operate in one year. The ?rm is currently all-equity ?nanced, and has 10 million shares outstanding
|
|
What is needed for police to obtain a warrant to search home
: "The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated.
|
|
Development and functions of police
: To understand contemporary policing in America, it is essential to understand the history by looking at the past eras.
|
|
Calculate the capital of annie
: Calculate the capital of Annie, a motivational consulting business's owner, Assume $720,000 in assets and $180,000 of liabilities at the end of account period
|
|
Problem on derivatives valuation
: A stock price is currently $36. During each three-month period for the next six months it is expected to increase by 9% or decrease
|