ASB.com is currently an all-equity firm. The firm's equity is worth £8 million. There are 500,000shares outstanding. The cost of capital on unlevered assets is 12% p.a. ASB.com pays no taxes.ASB.com plans to raise £800,000 by issuing risk-free debt to be repaid in perpetuity. ASB.com willuse the funds raised to repurchase the stocks. The cost of risk-free debt is 5% p.a.a) Calculate the annual unlevered cash flows in perpetuity that are compatible with a marketvaluation of £8 million. Calculate the ASB.com stock price.b) Calculate the annual interest expense if ASB.com goes ahead with the debt issue. What amountof cash flows will be left for equity holders?c) Since ASB.com pays no taxes, calculate the firm's value after the share repurchase and the debtissue.d) Calculate the equity value after the repurchase. Calculate the rate of return on equity after therepurchase. Explain why the rate of return on equity has or has not changed.

Answered: ASB.com is currently an all-equity…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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