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d) What is the WACC of e) What would be the firm's value and overall cost of capital, value) debt in generating its EBITs of $580,000? f) Complete the following table. In M&M case II, what level of debt is optimal? Value of Debt Value of Firm Value of Equity ?? ?? 0 2.2% 4,422,291 600,000 3,822,291 2.2% 4,632,291 1,200,000 3,432,291 2.2% 2.2% 4,842,291 1,800,000 3,042,291 2.2% 22 2,400,000 2.2% Ro ?? 762 291 Rr ?? 9.639% 10.484% 11.546% ?? 14.768% WACC ?? 8.525% 8.139% 7.786% ?? 7.164%

d) What is the WACC of e) What would be the firm's value and overall cost of capital, value) debt in generating its EBITs of $580,000? f) Complete the following table. In M&M case II, what level of debt is optimal? Value of Debt Value of Firm Value of Equity ?? ?? 0 2.2% 4,422,291 600,000 3,822,291 2.2% 4,632,291 1,200,000 3,432,291 2.2% 2.2% 4,842,291 1,800,000 3,042,291 2.2% 22 2,400,000 2.2% Ro ?? 762 291 Rr ?? 9.639% 10.484% 11.546% ?? 14.768% WACC ?? 8.525% 8.139% 7.786% ?? 7.164%

Essentials Of Investments
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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Plz solve problem 3 all parts d , e and f only and solve only by handwritten . I didn't need on excel or anything. I need Formula calculation and plz solve handwritten correctly and take a thumb up plz
Problem 3: Alias Industries is currently an all-equity firm. In the coming year the firm is forecasting annual EBIT level $580,000. The firm expects no growth in the EBITS as it will pay all the earnings in cash dividends to its shareholders. As a result, the EBIT level of $580,000 will remain constant forever. The asset beta of the firm has an estimated value of 1.25. The expected return on a Government of Canada treasury bill is 2.2%, and the return on the TSX composite index is 7.6%. The firm has 260,000 shares of common stock outstanding. M&M Case I: no tax and no default risk. Assume cost of debt is 2.2%. a) What is the WACC of this all-equity financed firm? What is the value of the firm? b) What would be the firm's value and overall cost of capital, if the firm uses $2,400,000 (market value) debt to generate its EBITS of $580,000? Show your work. c) Complete the following table. In M&M case I, what level of debt is optimal? c) Complete the following table. In M&M case I, what level of debt is optimal? Value of Value of Value of Ro Rr WACC Firm Debt Equity ?? ?? 2.2% ?? ?? ?? 600,000 5,880,447 1,200,000 5,280,447 1,800,000 4,680,447 ?? ?? 9.639% ?? ?? 10.484% ?? ?? ?? 11.546% ?? ?? ?? ?? ?? 2,400,000 3,000,000 3,480,447 3,600,000 2,880,447 ?? ?? ?? 14.768% ?? ?? ?? 17.386% ?? M&M Case II: Assume tax rate is 35% but no default risk. Assume cost of debt is 2.2%. d) What is the WACC of this all-equity financed firm? What is the value of the firm? e) What would be the firm's value and overall cost of capital, if the firm uses $2,400,000 (market value) debt in generating its EBITS of $580,000? f) Complete the following table. In M&M case II, what level of debt is optimal?
Transcribed Image Text:Problem 3: Alias Industries is currently an all-equity firm. In the coming year the firm is forecasting annual EBIT level $580,000. The firm expects no growth in the EBITS as it will pay all the earnings in cash dividends to its shareholders. As a result, the EBIT level of $580,000 will remain constant forever. The asset beta of the firm has an estimated value of 1.25. The expected return on a Government of Canada treasury bill is 2.2%, and the return on the TSX composite index is 7.6%. The firm has 260,000 shares of common stock outstanding. M&M Case I: no tax and no default risk. Assume cost of debt is 2.2%. a) What is the WACC of this all-equity financed firm? What is the value of the firm? b) What would be the firm's value and overall cost of capital, if the firm uses $2,400,000 (market value) debt to generate its EBITS of $580,000? Show your work. c) Complete the following table. In M&M case I, what level of debt is optimal? c) Complete the following table. In M&M case I, what level of debt is optimal? Value of Value of Value of Ro Rr WACC Firm Debt Equity ?? ?? 2.2% ?? ?? ?? 600,000 5,880,447 1,200,000 5,280,447 1,800,000 4,680,447 ?? ?? 9.639% ?? ?? 10.484% ?? ?? ?? 11.546% ?? ?? ?? ?? ?? 2,400,000 3,000,000 3,480,447 3,600,000 2,880,447 ?? ?? ?? 14.768% ?? ?? ?? 17.386% ?? M&M Case II: Assume tax rate is 35% but no default risk. Assume cost of debt is 2.2%. d) What is the WACC of this all-equity financed firm? What is the value of the firm? e) What would be the firm's value and overall cost of capital, if the firm uses $2,400,000 (market value) debt in generating its EBITS of $580,000? f) Complete the following table. In M&M case II, what level of debt is optimal?
M&M Case II: Assume tax rate is 35% but no default risk. Assume cost of debt is 2.2%. d) What is the WACC of this all-equity financed firm? What is the value of the firm? c) What would be the firm's value and overall cost of capital, if the firm uses $2,400,000 (market value) debt in generating its EBITS of $580,000? ) Complete the following table. In M&M case II, what level of debt is optimal? Value of Value of Value of Ro Rr WACC Equity ?? Firm Debt ?? 4,422,291 4,632,291 1,200,000 3,432,291 2.2% 4,842,291 1,800,000 2.2% ?? ?? 600,000 3,822,291 2.2% 9.639% 8.525% 10.484% 8.139% 3,042,291 2.2% 11.546% 7.786% ?? 2,400,000 ?? 2.2% ?? ?? 5,262,291 3,000,000 2,262,291 2.2% 14.768% 7.164% 3of 3 5,262,291 3,000,000 2,262,291 2.2% 4.470 14.768% 7.164%
Transcribed Image Text:M&M Case II: Assume tax rate is 35% but no default risk. Assume cost of debt is 2.2%. d) What is the WACC of this all-equity financed firm? What is the value of the firm? c) What would be the firm's value and overall cost of capital, if the firm uses $2,400,000 (market value) debt in generating its EBITS of $580,000? ) Complete the following table. In M&M case II, what level of debt is optimal? Value of Value of Value of Ro Rr WACC Equity ?? Firm Debt ?? 4,422,291 4,632,291 1,200,000 3,432,291 2.2% 4,842,291 1,800,000 2.2% ?? ?? 600,000 3,822,291 2.2% 9.639% 8.525% 10.484% 8.139% 3,042,291 2.2% 11.546% 7.786% ?? 2,400,000 ?? 2.2% ?? ?? 5,262,291 3,000,000 2,262,291 2.2% 14.768% 7.164% 3of 3 5,262,291 3,000,000 2,262,291 2.2% 4.470 14.768% 7.164%
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