Value of the company due to expected bankruptcy costs

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Reference no: EM131451957

1. Sustain In. has a target capital structure of 70 percent common stock and 30 percent debt. Its cost of equity is 13 percent, and the cost of debt is 6 percent. The relevant tax rate is 35 percent. What is Sustain Inc’s WACC?

A. 10.39 %

B. 11.90%

C. 11.55%

D. 12.65% E. Impossible to calculate with information given.

2. Cammy, Inc., has debt outstanding with a face value of $6 million. The value of the firm if it were entirely financed by equity would be $17.85 million. The company also has 350,000 shares of stock outstanding that sell at a price of $38 per share. The corporate tax rate is 35 percent. What is the decrease in the value of the company due to expected bankruptcy costs?

A. $650,000

B. $1,000,000

C. $19,300,000 D. 750,000

E. Impossible to calculate with information given.

3. Lola’s Dance Studio currently has debt outstanding with a market value of $100,000 and a cost of 8 percent. The company has EBIT of $8,000 that is expected to continue in perpetuity. Assume there are no taxes.

I. What is the value of the company's equity?

A. $50,000

B. $100,000

C. $1,000,000

D. $0

E. Impossible to calculate with information given.

II. What is the debt-to-value ratio?

A. 1.0

B. 1.9

C. 0.5

D. 1.26

E. Impossible to calculate with information given.

III. What are the equity value and debt-to-value ratio if the company's growth rate is 3 percent?

A. 1.000

B. 0.954

C. 0.641

D. 1.263

E. Impossible to calculate with information given.

IV. What are the equity value and debt-to-value ratio if the company's growth rate is 7 percent?

A. 1.000

B. 0.954

C. 0.641

D. 1.263

E. Impossible to calculate with information given.

Reference no: EM131451957

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