1)An all-equity firm has 9 million shares outstanding and each share is priced at $167. The firm announces that it will be issuing $260 million in permanent debt that they will use to repurchase shares. The market hears this news and assimilates the information immediately. What is the new share price? Assume the firm's tax rate is 21% and there are no financial distress costs. 2)A CEO, working on behalf of the equityholders, is choosing between two mutually-exclusive projects: A and B. A has a 100% probability of earning $150 million. B has an 80% probability of earning $200 million and a 20% probability of earning $0. Ignore discounting. The firm has debt to pay of $100 million. Solve for which project has the highest expected value for the equityholders. What is that value? 3) Your firm is evaluating a project that will generate the following cash flows next year with the following probabilities: Cash Flow at t=1 Probability Good Case $600M 0.75 Bad Case $200M 0.25 You have debt due in one year in the amount of $250M. In case of a default, 13% of the cash flows will be lost due to bankruptcy costs. Assume the proper discount rate for all cash flows is 14%. How much are expected bankruptcy costs today? You can either solve for expected bankruptcy costs directly, or by calculating how much less will your levered firm (V-L) be worth today compared to an unlevered firm (V-U)? 4) An all-equity firm has 3 million shares currently priced at $207 per share. The firm is considering issuing $23 million of permanent debt and using the proceeds to repurchase shares. The tax rate is 21%. What will be the total market value of the equity in millions after the debt is issued and after the shares are repurchased?
1)An all-equity firm has 9 million shares outstanding and each share is priced at $167. The firm announces that it will be issuing $260 million in permanent debt that they will use to repurchase shares. The market hears this news and assimilates the information immediately. What is the new share price? Assume the firm's tax rate is 21% and there are no financial distress costs.
2)A CEO, working on behalf of the equityholders, is choosing between two mutually-exclusive projects: A and B.
A has a 100% probability of earning $150 million.
B has an 80% probability of earning $200 million and a 20% probability of earning $0. Ignore discounting.
The firm has debt to pay of $100 million. Solve for which project has the highest expected value for the equityholders. What is that value?
3)
Your firm is evaluating a project that will generate the following cash flows next year with the following probabilities:
| Cash Flow at t=1 | Probability | |
| Good Case | $600M | 0.75 |
| Bad Case | $200M | 0.25 |
You have debt due in one year in the amount of $250M. In case of a default, 13% of the cash flows will be lost due to bankruptcy costs. Assume the proper discount rate for all cash flows is 14%. How much are expected bankruptcy costs today?
You can either solve for expected bankruptcy costs directly, or by calculating how much less will your levered firm (V-L) be worth today compared to an unlevered firm (V-U)?
4) An all-equity firm has 3 million shares currently priced at $207 per share. The firm is considering issuing $23 million of permanent debt and using the proceeds to repurchase shares. The tax rate is 21%. What will be the total market value of the equity in millions after the debt is issued and after the shares are repurchased?
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