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Consider a firm that has an EBIT of $3,000,000 per year for ever. There are 1,000,000 shares outstanding. The firm also has $10 million of perpetual debt with an interest rate of 8 percent (also its coupon rate) in its capital structure. At the existing capital structure, the firm’s cost of equity is 12 percent and the cost of debt is 8 percent. The firm faces a tax rate of 30 percent. The firm announces that it wishes to raise the debt level to $14 million. The old debt will be retired and the firm will issue another $14 million of new debt and use the proceeds to buy back shares. At the higher debt level, the cost of debt is expected to be 9 percent and the cost of equity 13 percent. (i) What is the value of the firm before the capital structure change and what is the stock price? (ii) What will be the value of the firm and the stock price after the capital structure change? (iii) How many shares will be outstanding after the capital structure change and what will be the firm’s debt to asset ratio?
Consider a same firm as above. The firm announces that it wishes to raise the debt level to $14 million. However, the old debt will be not be retired and the firm will issue another $4 million of new debt and use the proceeds to buy back shares. At the higher debt level, the cost of debt is expected to be 9 percent and the cost of equity 13 percent. (iv) What will be the value of the firm and the stock price after the capital structure change? (v) How many shares will be outstanding after the capital structure change and what will be the firm’s debt to asset ratio?
Scanlin, Inc., is considering a project that will result in initial aftertax cash savings of $1.73 million at the end of the first year, and these savings will grow at a rate of 3 percent per year indefinitely. The firm has a target debt−equity ratio..
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Given the following information about Reliance Ltd., what is the required rate of return of its ordinary shareholders?
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Which one of the following will increase the net present value of a project?
Scott Investors, Inc., is considering the purchase of a $360,000 computer with an economic life of five years. The computer will be fully depreciated over five years using the straight-line method. The market value of the computer will be $60,000 in ..
Compare and contrast centralized clearing between exchange traded and OTC products.
Assume that you have been hired by a county to develop a transportation asset management (TAM) program that is in compliance with GASB 34 requirements.
A firm does not pay a dividend. It is expected to pay its first dividend of $0.15 per share in three years. This dividend will grow at 9 percent indefinitely. Using a 10 percent discount rate, compute the value of this stock
You are a shareholder in a "C" corporation. This corporation earns $5 per share before taxes. After it has paid taxes, it will distribute the remainder of its earnings to you as a dividend. The dividend is income to you, so you will then pay taxes on..
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