Rally inc. Is an all equity firm with assets worth $25 billion.... Rally, Inc., is an all-equity firm with assets worth $25 billion.and 10 billion shares outstanding. Rally plans to borrow $5billion and use funds to repurchase shares. Rally's corporatetax rate is 25%, and Rally plans to keep its outstanding debtequal to $5 billion permanently.Without the increase in leverage, what would be Rally'sshare price?

Note that Rally Inc. is an all-equity firm; hence, the value of its equity is equal to its total…

Answered: Rally, Inc., is an all-equity firm with…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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An unlevered firm has expected earnings of $2,401 and a market value of equity of $19,600. The firm is planning to issue $4,000 of debt at 6 percent interest and use the proceeds to repurchase shares at their current market value. Ignore taxes. What will be the cost of equity after the repurchase?
Bloom Company Limited expects its EBIT to be $80,000 every year forever. The firm canborrow at 9 percent. The firm currently has no debt, and its cost of equity is 13 percent. Thetax rate is 35 percent. The firm will borrow $100,000 and use the proceeds to repurchase shares. You are required to answer the following:(a) What is the value of the unlevered firm? (b) What will be the value of firm after recapitalization? (c) What is the value of equity in the recapitalized firm? (d) What is the Weighted Cost of Capital of the levered firm?
LuLu In. wants to utilize a different debt-equity ratio than it had previously. It is planning to increase the firm’s current debt-equity ratio of 0.4 to a higher value of 0.8 by issuing debt to repurchase a portion of its common stock. LuLu In. currently has $12 million worth of debt outstanding and faces a pretax cost of debt of 8 percent per year. The firm expects to have an EBIT of $3.6 million per year in perpetuity and pays no taxes. Use the Modigliani and Miller propositions to determine the expected rate of return on the firm’s equity after the issue is announced.
Remex (RMX) currently has no debt in its capital structure. The beta of its equity is 1.44. For each year into the indefinite future, Remex's free cash flow is expected to equal $26 million. Remex is considering changing its capital structure by issuing debt and using the proceeds to buy back stock. It will do so in such a way that it will have a 25% debt-equity ratio after the change, and it will maintain this debt-equity ratio forever. Assume that Remex's debt cost of capital will be 6.37%. Remex faces a corporate tax rate of 15%. Except for the corporate tax rate of 15%, there are no market imperfections. Assume that the CAPM holds, the risk-free rate of interest is 4.9%, and the expected return on the market is 10.78%. a. Using the information provided, fill in the table below. b. Using the information provided and your calculations in part (a), determine the value of the tax shield acquired by Remex if it changes its capital structure in the way it is…
The Leap Corporation expects next year’s net income to be P15 million. The firm’s debt ratio is currently 40%. Leap has P12 million of profitable investment opportunities, and it wishes to maintain its existing debt ratio. According to the residual distribution model (assuming all payments are in the form of dividends), how large should Leap's dividend payout ratio be next year?
An all-equity firm has expected earnings of $14,200 and a market value of $82,271. The firm is planning to issue $15,000 of debt at 6.3 percent interest and use the proceeds to repurchase shares at their current market value. Ignore taxes. What will be the cost of equity after the repurchase?
Milton Industries expects free cash flows of $19 million each year. Milton's corporate tax rate is 22 %, and its unlevered cost of capital is 13%. Milton also has outstanding debt of $73.37 million, and expects to maintain this level of debt permanently. a. What is the value of Miton Industries without leverage? b. What is the value of Milton Industries with leverage? Cam a. What is the value of Milton Industries without leverage? The value of Milton Industries without leverage is 5 million (Round to two decimal places.) b. What is the value of Milton Industries with leverage? The value of Milton Industries with leverage is $million. (Round to two decimal places)
Refi Corporation is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $2.7 million worth of debt outstanding. The cost of this debt is 9 percent per year. The firm expects to have an EBIT of $1.26 million per year in perpetuity and pays no taxes. a. What is the market value of the firm before and after the repurchase announcement? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) b. What is the expected return on the firm’s equity before the announcement of the stock repurchase plan? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) c. What is the expected return on the equity of an otherwise identical all-equity firm? (Do not round intermediate calculations and…
NEKO Inc. has forecasted that its net income will be P520,000. The company has an debt-to-equity ratio of 25%. The dividend policy of the firm follows the residual dividend model. NEKO Inc. has a project that needs funding amounting to P600,000. The number of issued and outstanding shares of NEKO Inc. is 5,000. How much of the project must be funded by equity?
GRK Co. is currently an all-equity firm with an expected return of 10%. The expected EBIT is $ 50,000 forever. Assume that the firm distributes all the net income to the equity holders. The firm is considering a leveraged recapitalization in which it would borrow $ 250,000 and repurchase existing shares. The firm's tax rate is 40%. The cost of debt is 7%. 1/ Calculate the value of the firm with leverage. 2/ Calculate the expected return of equity after recapitalization. 3/ Calculate the cost of capital of the firm after recapitalization.
Rally inc is an all equity firm with assets worth $25B and 10B shares outstanding. Rally plans to borrow $10B and use funds to repurchase shares. Rally’s corporate tax rate is 35% and Rally plans to keep its outstanding debt equal to $10B permanently. Without the increase in leverage, what is the value of the firm?
Assume capital markets are perfect (i.e. the Modigliani- Miller Theorems hold). The Cat Nap Pet Stores capital structure is currently comprised of 13 million dollars of debt and 16 million dollars of equity. If the firm issues 2 million dollars in new debt, what will the value of the company's equity be after the issuance of the new debt?

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