The expected return on the equity of the re-capitalized firm

Assignment Help Financial Management

Reference no: EM131189979

Protron Inc. is currently an all-equity firm that currently has $200 million in assets. On average, the return on its physical assets (ROA) every year is 17.5 percent. That is, on average, EBIT is 17.5 percent of the value of the assets. However, there are fluctuations in the annual return such that the beta of the ROA is 1.25. The marginal corporate tax rate for SleazeCo is .10 (i.e., 10%). The personal tax rate of dividend and capital gains distributions is equal to that for interest income; both types of tax rates are 28 percent. The management of Protron Inc. is thinking about doing a leverage re-capitalization whereby it raises $50 million in debt at an interest rate of 2 percent and pays a one-time dividend of $50 million to the equity holders. If it does this, the fluctuations in the ROA are such that Protron Inc. can always afford to make its debt payments. Thus, the interest rate on the debt is the risk-free rate. The risk-free rate is .02 and the expected return on the market is .13.

1. What is the expected return on the equity of the re-capitalized firm?

2. What is the weighted average cost of capital after re-capitalization?

3. Why did the weighted average cost of capital change in the direction it changed?

Reference no: EM131189979

Questions Cloud

What is the company pre-money value-post-money value : A venture capital company buys 400,000 shares of a start-up’s stock for $5 million. If the company has 1.6 million shares outstanding prior to the purchase, what is the company’s pre-money value? What is its post-money value?

Performance of a hedge fund portfolio manager : Provide two reasons why it is more difficult to assess the performance of a hedge fund portfolio manager than it is to assess the performance a typical mutual fund manager.

Corporation is distinct-permanent and separate legal entity : A corporation is a distinct, permanent, and separate legal entity owned by stockholders or shareholders. Corporate managers are hired by shareholders to manage the corporation. Why does it make sense for corporations to maximize shareholder wealth? W..

Initial investment costs : Consider an investment that costs $70 000. If the investment returns cash flows of $10 000 in the first year and the cash flows increase by 35% each year, when will the initial investment costs be recovered?

The expected return on the equity of the re-capitalized firm : Protron Inc. is currently an all-equity firm that currently has $200 million in assets. On average, the return on its physical assets (ROA) every year is 17.5 percent. That is, on average, EBIT is 17.5 percent of the value of the assets. What is the ..

Examine performance management issues and processes : Examine at least three (3) key legal and ethical issues that could potentially impact the performance management system. Support your response with specific examples of the identified issues' possible effects on the performance management system.

How and why did european nations redefine their empires : How and why did European nations redefine their empires in the 1950s and 1960s? Your response should be at least 200 words in length.

How contemporary perceptions of hitlers nazi germany shaped : How are contemporary perceptions of Hitler's Nazi Germany shaped by either the Holocaust or the Trail of Adolf Eichmann? Your response should be at least 200 words in length.

What is the dollar price of the bond : Union Local School District has bonds outstanding with a coupon rate of 5.1 percent paid semiannually and 18 years to maturity. The yield to maturity on these bonds is 4.6 percent and the bonds have a par value of $10,000. What is the dollar price of..

User Account

All Pages