For this problem, all M&M with taxes (40%) assumptions apply. After a successful college football career, Tim Turbo partnered with Danny Waffle (naming themselves TD Industries) to manufacture and distribute fruit pies. On 1/1/2019, the company had one product that generated EBIT of $200,000 on 12/31 of each year (forever), with an asset beta of 1.15. The firm faced a tax rate of 40 percent, and the firm had no debt outstanding. At that time, the risk-free rate, Rf, was 2 percent and the MRP was 5 percent. The firm had 100,000 shares outstanding, and all earnings were (and will always be paid out as dividends. On 1/2/2019 at 8:00 a.m., TD announced a new pie product: The project required that the company spend $850,000 to purchase The Buckeye Grinder 2500, a buckeye mashing machine. For tax purposes, the machine will not be depreciated since it will last forever. No working capital is required. To fund the project, all $850,000 was raised as perpetual debt, with an annual coupon rate equal to the risk-free rate, and interest paid annually. The project increased the company's EBIT by $486,666.66 a year forever (starting on 12/31/2019). The project had an asset beta of 1.25. When the market opened at 9:30 a.m., the price / share fully adjusted to the announcement. The debt was then issued, and the project was implemented. What was the asset beta when the entire transaction was complete? Round to 3 decimals
For this problem, all M&M with taxes (40%) assumptions apply.
After a successful college football career, Tim Turbo partnered with Danny Waffle (naming themselves TD Industries) to manufacture and distribute fruit pies.
On 1/1/2019, the company had one product that generated EBIT of $200,000 on 12/31 of each year (forever), with an asset beta of 1.15. The firm faced a tax rate of 40 percent, and the firm had no debt outstanding.
At that time, the risk-free rate, Rf, was 2 percent and the MRP was 5 percent.
The firm had 100,000 shares outstanding, and all earnings were (and will always be paid out as dividends.
On 1/2/2019 at 8:00 a.m., TD announced a new pie product:
- The project required that the company spend $850,000 to purchase The Buckeye Grinder 2500, a buckeye mashing machine. For tax purposes, the machine will not be depreciated since it will last forever. No working capital is required.
- To fund the project, all $850,000 was raised as perpetual debt, with an annual coupon rate equal to the risk-free rate, and interest paid annually.
- The project increased the company's EBIT by $486,666.66 a year forever (starting on 12/31/2019).
- The project had an asset beta of 1.25.
When the market opened at 9:30 a.m., the price / share fully adjusted to the announcement. The debt was then issued, and the project was implemented.
What was the asset beta when the entire transaction was complete?
Round to 3 decimals
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