King Inc. is an all-equity firm with 5,000 outstanding shares. Its firm value is $250,000 and EBIT is $36,000 per year forever. The tax rate is 40 %. King is considering two recapitalization plans. Plan A: borrow $125,000 perpetual debt at 5% interest to repurchase stocks and the present value of bankruptcy costs is estimated to be $ 0. Plan B: borrow $160,000 perpetual debt at 8% interest to repurchase stocks and the present value of bankruptcy costs is estimated to be $7,500. (a) Calculate the equity value, cost of equity, weight average cost of capital, stock price after recapitalization plan A. (b) Calculate the equity value, cost of equity, weight average cost of capital, stock price after recapitalization plan B. (c) Calculate the breakeven EBIT of the two recapitalization plans.

King Inc. is an all-equity firm with 5,000 outstanding shares. Its firm value is $250,000 and EBIT is $36,000 per year forever. The tax rate is 40 %. King is considering two recapitalization plans. Plan A: borrow $125,000 perpetual debt at 5% interest to repurchase stocks and the present value of bankruptcy costs is estimated to be $ 0. Plan B: borrow $160,000 perpetual debt at 8% interest to repurchase stocks and the present value of bankruptcy costs is estimated to be $7,500. (a) Calculate the equity value, cost of equity, weight average cost of capital, stock price after recapitalization plan A. (b) Calculate the equity value, cost of equity, weight average cost of capital, stock price after recapitalization plan B. (c) Calculate the breakeven EBIT of the two recapitalization plans.

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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Edward Corporation expects an EBIT of $40,000 every year forever. The company currently has no debt and its cost of equity is 15 percent. The tax rate is 30 percent. The company is able to borrow at 8 percent. The CFO of the company decides to change the company's capital structure by taking on a fixed amount of debt forever. If Edward is worth $300,000 after the capital restructuring, how much does Hunter need to borrow? O $361,905 O $377,778 O $433,333 O $400,000
Hunter Corporation expects an EBIT of $30,000 every year forever. The company currently has no debt and its cost of equity is 14 percent. The tax rate is 20 percent. The company is able to borrow at 8 percent. What will the value of the company be if it takes on debt equal to 60 percent of its levered value? [Note: the proceeds from issuing new debt are used to repurchase Hunter’s equity.] Group of answer choices $251,488.1 $171,428.6 $274,285.8 $194,805.2
King Inc. is an all-equity firm with 5,000 outstanding shares. Its firm value is $250,000 andEBIT is $36,000 per year forever. The tax rate is 40%. King is considering two recapitalizationplans.Plan A: borrow $125,000 perpetual debt at 5% interest to repurchase stocks and the present valueof bankruptcy costs is estimated to be $0.Plan B: borrow $160,000 perpetual debt at 8% interest to repurchase stocks and the present valueof bankruptcy costs is estimated to be $7,500(a) Calculate the equity value, cost of equity, weight average cost of capital, stock price afterrecapitalization plan A.(b) Calculate the equity value, cost of equity, weight average cost of capital, stock price afterrecapitalization plan B.(c) Calculate the breakeven EBIT of the two recapitalization plans.
King Inc. is an all-equity firm with 5,000 outstanding shares. Its firm value is $250,000 andEBIT is $36,000 per year forever. The tax rate is 40%. King is considering two recapitalizationplans.Plan A: borrow $125,000 perpetual debt at 5% interest to repurchase stocks and the present valueof bankruptcy costs is estimated to be $0.Plan B: borrow $160,000 perpetual debt at 8% interest to repurchase stocks and the present valueof bankruptcy costs is estimated to be $7,500(a) Calculate the equity value, cost of equity, weight average cost of capital, stock price afterrecapitalization plan A.(b) Calculate the equity value, cost of equity, weight average cost of capital, stock price afterrecapitalization plan B.(c) Calculate the breakeven EBIT of the two recapitalization plans.can you answer question c?a and b is solved:a) Plan A: equity value = $125,000, cost of equity= 12.9%, weight average cost of capital= 6.465, stock price after recapitalization plan A = $ 25 per share (b) Plan B:…
Edward Corporation expects to earn $40,000 in EBIT every year forever. The company currently has no debt and its cost of equity is 15 percent. The tax rate is 20 percent. The company can borrow at 8 percent. The CFO of the company decides to change the company's capital structure by taking on $X debt forever. And the borrowed money will be used to buy back $X worth of equity. If Edward is worth $300,000 after the capital restructuring, what is the value of X?
Hunter Corporation expects an EBIT of $30,000 every year forever. The company currently has no debt and its cost of equity is 14 percent. The tax rate is 20 percent. The company is able to borrow at 8 percent. What will the value of the company be if it takes on debt equal to 60 percent of its levered value? [Note: the proceeds from issuing new debt are used to repurchase Hunter's equity.] O $251,488.1 $194,805.2 O $274,285.8 O $171,428.6
Moss Inc. is considering issuing $1,000,000 worth of perpetual bonds yielding $60,000 interest per year. Moss Inc. currently has no debt outstanding and will use the bond proceeds to repurchase equity. Moss Inc. has 100% dividend payout ratio and EBIT is $2,000,00 per year forever. Corporate tax rate is 60%. a. If the personal tax rate is 30%, which plan (all equity or debt + equity) offers the investors the highest cash flows? Why? b. If the shareholders require a 15% return before personal taxes, what is the value of the firm under each plan? (Do not ignore personal taxes). c. Suppose Ts=25% and Tb=35%. What are the investors' cash flows under each plan? Repeat part (b).
Fields & Company expects its EBIT to be $107,000 every year forever. The company can borrow at 7 percent. The company currently has no debt and its cost of equity is 11 percent. The tax rate is 21 percent. The company borrows $162,000 and uses the proceeds to repurchase shares. a. What is the cost of equity after recapitalization? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Cost of equity b. WACC % %
Fields & Company expects its EBIT to be $159,000 every year forever. The firm can borrow at 8 percent. The company currently has no debt, and its cost of equity is 15 percent and the tax rate is 24 percent. The company borrows $201,000 and uses the proceeds to repurchase shares. a. What is the cost of equity after recapitalization? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the WACC? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) a. Cost of equity b. WACC % %
Organica Ltd. generates $350,000 cash flow each year. The cost of equity capital is 18% and the company has no debt outstanding. Organica would like to buy back $ 950,000 of its equity by borrowing the same amount at 12% per year. Assume that the debt will continue for an indefinite period and Modigliani and Miller proposition 1 holds, what is the cost of equity capital after the change in capital structure?
Connor Corp. has an EBIT of $970,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 12 percent, and the corporate tax rate is 21 percent. The company also has a perpetual bond issue outstanding with a market value of $1.91 million. What is the value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g., 1,234,567.)
Bruce & Co. expects its EBIT to be $165,000 every year forever. The company currently has no debt but can borrow at 8.6 percent while its cost of equity is 14.7 percent. The tax rate is 21 percent. The company is planning to borrow $55,000 and use the loan proceeds to repurchase shares. What will be the WACC after recapitalization? Select one: 14.57 percent 15.07 percent 14.51 percent 14.11 percent 14.58 percent

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