Progressive home health care inc is a for-profit provider

Reference no: EM13370280

Progressive Home Health Care Inc. is a for-profit provider of home health care services in the Pacific Northwest. At present, it has EBIT of $2 million per year, no debt, and a market value of about $12 million. Although management is pleased with the good financial condition of Progressive, they are also concerned that firm may be the target of a potential hostile takeover by a large competitor.
Thus, Progressive is considering issuing debt to buy back shares, the interest on which would be tax deductible (its tax rate is 40%). Management identifies that as the amount of debt increases, both the value of the firm and the risk of financial distress increase.

The CFO estimates that the show value of any future financial distress costs is $8 million, and that the probability of distress increases with the amount of debt in the subsequent steps:

Probability of financial
Value of debt distress
0 0%
2,500,000 1%
$5,000,000 2%
$7,500,000 4%
$10,000,000 8%
$12,500,000 16%
$15,000,000 32%
$20,000,000 64%

a. Evaluate what is Progressive's cost of equity and corporate cost of capital now?

b. According to MM with corporate taxes, Find what is the optimal level of debt?

c. According to MM with corporate taxes and financial distress, determine what is the optimal level of debt?

d. Show the value of Progressive, with and without costs of financial distress, as a function of the amount of debt. Why do the lines differ in shape?

Reference no: EM13370280

Questions Cloud

This is a project due by the 18th of april get a magazine : this is a project due by the 18th of april. get a magazine newspaper etc. online or otherwise choose an article

1 find what was youngs total share of net loss for the : 1. find what was youngs total share of net loss for the first year?a. 3900 loss.b. 11700 loss.c. 10400 loss.d. 24700

A partnership began its first year of operations with the : a partnership began its first year of operations with the subsequent capital balancesyoung capital 143000eaton capital

Dicks sporting goods makes customized uniforms the great : dicks sporting goods makes customized uniforms. the great northwest league has provided to buy 80 basketball jerseys

Progressive home health care inc is a for-profit provider : progressive home health care inc. is a for-profit provider of home health care services in the pacific northwest. at

Larsen company manufactures and sells a single product : larsen company manufactures and sells a single product widgets. three pounds of clay are required to make one widget.

1or the pair of functions evaluate the domain of f gfx : 1.for the pair of functions evaluate the domain of f g.fx 2x -9 gx 4x -3.2.for the pair of functions evaluate the

What is the importance of division field if you found that : what is the importance of division field? if you found that most of the past due accounts were related to a positive

1batesmanor furniturea given thati the average batesmanor : 1.batesmanor furniturea given thati the average bates.manor sales in a retail store that carries their furniture is

User Account

All Pages