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

  Department of a large corporation

The finance department of a large corporation has evaluated a possible capital project using the NPV method, the Payback Method, and the IRR method. The analysts are puzzled, since the NPV indicated rejection, but the IRR and Payback methods both..

  Find what is the nominal yield to maturity

A firm's bonds have a maturity of 8 years with a $1,000 face value, have an 11% semiannual coupon, are callable in 4 years at $1,149, and currently sell.

  Define the correlation coefficient

What if the correlation coefficient were -0.5 instead? How does the portfolio standard deviation compare to the individual standard deviations.

  Percent coupon bonds on the market

Staind, Inc., has 11 percent coupon bonds on the market that have 10 years left to maturity. The bonds make semiannual payments.

  Last year lakeshas lounge furniture corporation had roa of

last year lakeshas lounge furniture corporation had an roa of 7.5 and a dividend payout ratio of 25. what is the

  What is the beta of cliff corp stock

Cliff Corp. stock currently sells for $50 per share and just paid a dividend of $2.00. If dividends are expected to grow at a constant rate of 4% annually.

  Calculate the expected return of investing

Suppose the market risk premium is 5% and the? risk-free interest rate is 2%.

  Training program for a group of twenty employees

Suppose you are going to conduct a training program for a group of twenty employees. These employees are different in age and gender.

  Highly compensated employees

All the following employees are considered highly compensated employees in the following year EXCEPT

  Discuss on performance metrics and conversion rate

Discuss on Performance metrics and Conversion rate and Abandonment rate & Return on investments, Potential ethical issues facing an e-business

  What is the breakeven quantity

A firm has fixed operating costs of $100,000 and variable costs of $4 per unit. If it sells the product for $6 per unit, what is the breakeven quantity

  Calculate the horizon value as of 2024

The Widget Company forecast free cash flow for the next five years is as follows:

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