User Account

All Pages

What is the value of the unlevered firm before recap

Assignment Help Finance Basics
Reference no: EM133072236

Overall: Rules:

Dell Gaming Inc. is unlevered and expects its EBIT to be $150 million every year forever. The cost of equity for Dell is 9%, and its tax rate is 25%. The firm can currently borrow long-term debt at a 5% interest rate. Under consideration is issuing $500 million in new debt, and the proceeds of the debt issuance would be used to immediately repurchase $500 million of stock. 

Ignore any financial distress costs for purposes of answering parts 1 and 2 to this question and assume that the firm has enough taxable income that the firm will always be able to use the interest tax shield - in other words, the debt will be outstanding FOREVER. 

Use Modigliani and Miller (MM) propositions I and II with corporate taxes and the related formulas to answer 1. and 2.

Questions:

  1. What is the value of the unlevered firm before the recap?
  2.  What is the value of the firm if it borrows $50 million and repurchases shares?
  3. If you were to also consider potential financial distress costs from borrowing, would you expect the value in part 2 to be higher or lower than your estimate in 2? Briefly explain your answer.

Reference no: EM133072236

Questions Cloud

Compute company cost of newly issued common stock : Compute (a) the company's cost of newly issued common stock (using the Dividend Growth Model) and (b) the company's WACC when the newly issued common stock is u
What is the total profit earned from project : 1. Please provide a print- out of the excel workbook for each part of the problem below along with the answer to each part.
Explain how organization has been transforming : Analysis of current state of MIS using 4 models of your choice from the following: 3 dimensions of IS/ 3 activities of IS/Porter's 5 forces/security issues
What is the required rate of return on the project : A project under consideration has an internal rate of return of 13% and a beta of 0.6. The risk-free rate is 8%, and the expected rate of return on the market p
What is the value of the unlevered firm before recap : Dell Gaming Inc. is unlevered and expects its EBIT to be $150 million every year forever. The cost of equity for Dell is 9%, and its tax rate is 25%.
Determine the contribution margin ratio : Variable costs are $10.83 per unit, and fixed costs are $63,300. Determine (a) the contribution margin ratio, (b) the unit contribution margin
Determine the break-even point in sales units : The variable cost is $24 per unit, while fixed costs are $34,398. Determine (a) the break-even point in sales units and (b) the break-even point
What is the amount of money : You have been putting your money at the end of year into a saving account at KayaRaya Bank that give you an 18% interest per annum.
Prepare an income statement for the most recent month : Prepare an income statement for the most recent month using the absorption costing method and choosing. A denominator level that represents normal capacity

Reviews

Write a Review

Finance Basics Questions & Answers

  Financial reporting and analysis

Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..

  A report on financial accounting

This report is specific for a core understanding for Financial Accounting and its relevant factors.

  Describe the types of financial ratios

Describe the types of financial ratios and other financial performance measures that are used during venture's successful life cycle.

  Differences between sole proprietorship and corporation

Briefly describe the major differences between a sole proprietorship and a corporation

  Prepare a cash budget statement

Calculate the expected value of the apartment in 20 years' time. What is the mortgage loan repayment at the beginning of each month

  What are the implied interest rates

What are the implied interest rates in Europe and the U.S.?

  State pricing theory and no-arbitrage pricing theory

State pricing theory and no-arbitrage pricing theory

  Small business administration

Identify the likely stage for each venture and describe the type of financing each venture is likely to be seeking and identify potential sources for that financing.

  Effect of financial leverage

The Effect of Financial Leverage and working capital management

  Evaluate the basis for the payment to the lender

Evaluate the basis for the payment to the lender and basis for the payment to the company-counterparty.

  Importance of opps, ipps, mpfs and dmepos

Research and discuss the differences and importance of : OPPS, IPPS, MPFS and DMEPOS.

  Time value of money

Time Value of Money project

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