Dabney Electronics currently has no debt. Its EBIT is $20 million and its tax rate is 40%. Itpays out all of its net income as dividends and has a zero growth rate. The current stock priceis $40 per share, and it has 2.5 million shares of stock outstanding. If it moves to a capitalstructure that has 40% debt and 60% equity (based on market values), its investment bankersbelieve its weighted average cost of capital would be 10%. What would its stock price be if itchanges to the new capital structure?$40.$60.$48.$52.

First we need to calculate value of firm by using equation below.

Answered: Dabney Electronics currently has no…

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

See similar textbooks

Similar questions

Assume zero corporate tax rate. Acorn Industries owns assets that have 80% probability of having market value $50 million in one year and 20% probability of having market value $20 million in one year. The risk free rate is 4% and Acorn's assets have cost of capital 10%. (a) If Acorn is unlevered, what is the value of Acorn's equity? (b) What is the expected return on equity? (c) What is the volatility of the equity return? (d) What is the WACC?
You were hired as a consultant to XYZ Company, whose target capital structure is 32% debt, 10% preferred, and 58% common equity. The interest rate on new debt is 8.40%, the yield on the preferred is 5.85%, the cost of common from retained earnings is 13.20%, and the tax rate is 33.00%. The firm will not be issuing any new common stock. What is XYZ's WACC?
The common stock and debt of XYZ Co. are valued $60 million and $40 million respectively. Currently cost of equity of the company is 18% and its cost of debt is 9%. If the company issues an additional $20 million of common stock and uses all of this cash to retire debt, what will be the new required rate of return on company’s equity? Assume change in leverage does not affect risk of debt and there are no taxes.
Currently, Dividend Airlines is an unlevered firm and expects to generate $330 free cash flow each year in perpetuity. Its corporate tax rate is 37%. The firm is considering a capital structure to allow $361 of debt. The debt is assumed to be rolled over when it matures with the same amount of principal. Its cost of debt capital is 15%. Similar unlevered firms in the same industry have a cost of equity capital of 28%. Assume no agency costs nor default risk. What will the value of Dividend Airlines be after the change of capital structure?
Zerox Inc. is contemplating acquiring its peer firm-Nova Corporation since Zerox believes that Nova is poorly managed. The most recent information about Nova is as follows: FCFF = 200 million, Market value of equity=$2,000 million, Outstanding debt=200 million, Before-tax cost of debt=5%, Tax rate=30%, Beta=1. Nova is already in steady state and is expected to grow 6% a year in the long term. The treasury bond rate is 3%, and the market risk premium is 6%. Zerox believes that the current financial leverage of Nova is not optimal and intends to increase the debt ratio of Nova to 20% of total capital from current level after the acquisition, which will incur a cost of debt of 5.5%. How much is the value of control worth in this acquisition plan?rnrnGroup of answer choicesrnrna). $203.27 millionrnb). $2,526.32 millionrnc). $2,152.28 millionrnd). $756.50 millionrne). $193.27 million
Hawar International is a shipping firm with a current share price of $4.50 and 10 million shares outstanding. Suppose Hawar announces plans to lower its corporate taxes by borrowing $10 million and repurchasing shares. a. With perfect capital markets, what will the share price be after this announcement? b. Suppose that Hawar pays a corporate tax rate of 40%, and that shareholders expect the change in debt to be permanent. If the only imperfection is corporate taxes, what will the share price be after this announcement? c. Suppose the only imperfections are corporate taxes and financial distress costs. If the share price rises to $4.55 after this announcement, what is the PV of financial distress costs Hawar will incur as the result of this new debt? Question content area bottom Part 1 a. With perfect capital markets, what will the share price be after this announcement? With perfect capital markets, the share price will be $enter your response here per share
Pennewell Publishing Inc. (PP) is a zero growth company. It currently has zero debt and its earnings before interest and taxes (EBIT) are $80,000. PP's current cost of equity is 10%, and its tax rate is 40%. The firm has 10,000 shares of common stock outstanding selling at a price per share of $48.00. Refer to Exhibit 16.1. Assume that PP is considering changing from its original capital structure to a new capital structure with 35% debt and 65% equity. This results in a weighted average cost of capital equal to 9.4% and a new value of operations of $510,638. Assume PP raises $178,723 in new debt and purchases T-bills to hold until it makes the stock repurchase. What is the stock price per share immediately after issuing the debt but prior to the repurchase? A) $45.90 B) $48.12 C) $51.06 (D) $53.33 (E) $58.75
BTC has 15M shares in an all-equity firm, at a price of $13 per share. The firm announced that they will borrow $100M to buy back shares (using the full amount of debt). They will keep this debt permanently. Upon announcement the share price increases to $16 per share. The corporate tax rate is 25%, taxes and financial distress costs are the only relevant market imperfections. What is the present value of the financial distress costs？
An unlevered firm has a value of $900 million. An otherwise identical but levered firm has $180 million in debt at a 4% interest rate, which is its pre-tax cost of debt. Its unlevered cost of equity is 12%. No growth is expected. Assuming the federal-plus-state corporate tax rate is 25%, use the MM model with corporate taxes to determine the value of the levered firm. Enter your answer in millions. For example, an answer of $10,550,000 should be entered as 10.55. Round your answer to the nearest whole number. S million
Roxy Broadcasting, Inc. is currently a low-levered firm with a debt-to-equity ratio of 2/7. The company wants to increase its leverage to 7/2 for debt to equity. If the current return on assets is 10% and the cost of debt is 8%, what are the current and the new costs of equity if Roxy operates in a world of no taxes?
Jenkins, Inc., has equity with a market value of $23.1 million and debt with a market value of $9.24 million. The cost of debt is 10 percent per year. Treasury bills that mature in one year yield 6 percent per year, and the expected return on the market portfolio over the next year is 11 percent. The beta of the company’s equity is 1.16. The firm pays no taxes. What is the cost of capital for an otherwise identical all-equity firm?
Qlink ltd is involved in manufacturing of fast -moving consumer goods.The firm is currently an all -equity firm with 30 million shares outstanding and stock price of Kshs.10 per share.The firm plans to announce that it will borrow Ksshs.400 million and use the funds to repurchase shares. The firm will pay interest only on this debt and has no plans to change its debt holding in future. The prevailing corporate tax rate is 30%.(i)What is the market value of the firm's existing existing assets before the announcement?(ii)What is the market value of the firm's assets(including tax shields) just after the debt is issued but before the shares are repurchased?(iii)What is the firm's share price just before the share repurchase?However many shares will Qlink Ltd repurchased?(iv) What are Qlink Ltd's market value balance sheet and share price after share repurchase?

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

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

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS