Company AAA and Company ZZZ have differences in their capital structures, but other thanthat they are pretty much alike. In this problem you will need to calculate the value of eachcompany's Equity. Given: Company AAA: Unlevered. Annual income is tax-free. $28.6 millionin EBIT is expected to be earned every year forever. No net income is retained, and the fullamount is used to pay dividends. 4.1 million shares are currently being traded in the market.Each share currently sells for $75. Company ZZZ: Levered. Annual income is tax-free. $87million is the market value of its debt. The debt has the following characteristics: neverendinginterest payments, 7 % interest rate. $28.6 million in EBIT is expected to be earned every yearforever. No net income is retained, and the full amount is used to pay dividends.1.9 millionshares are currently being traded in the market. Each share currently sells for $119.

Value of equity is the market capitalization of the company and it can be obtained by calculation of…

Answered: that they are pretty much alike. In…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter21: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 9P

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Company AAA and Company ZZZ have differences in their capital structures, but other than that they are pretty much alike. In this problem you will need to calculate the value of each company's Equity. Given: Company AAA: Unlevered. Annual income is tax-free. $11.1 million in EBIT is expected to be earned every year forever. No net income is retained, and the full amount is used to pay dividends. 3.4 million shares are currently being traded in the market. Each share currently sells for $58. Company ZZZ: Levered. Annual income is tax-free. $59 million is the market value of its debt. The debt has the following characteristics: neverending interest payments, 5% interest rate. $11.1 million in EBIT is expected to be earned every year forever. No net income is retained, and the full amount is used to pay dividends.1.7 million shares are currently being traded in the market. Each share currently sells for $75. (Do not round intermediate calculations and enter your answer in dollars, not…
Suppose Tool Corp. is an unleveraged firm. It has an expected EBIT of 67,000 in Perpetuity and a tax rate of 35%. Its cost of equity is 10.25%. What is Tool Corp’s firm value? (SHOW YOUR WORK)
Lo, Incorporated doesn't face any taxes and has $150 million in assets, currently financed entirely with equity. Equity is worth $7 per hare, and book value of equity is equal to market value of equity. Also, let's assume that the firm's expected values for EBIT depend bon which state of the economy occurs this year, with the possible values of EBIT and their associated probabilities as shown below: State Probability of state Expected EBIT in state Pessimistic 0.45 $5 million Expected EPS Optimistic 0.55 $ 19 million The firm is considering switching to a 40-percent-debt capital structure, and has determined that it would have to pay a 12 percent vield on perpetual debt in either event. What will be the level of expected EPS if the firm switches to the proposed capital structure? Note: Do not round intermediate calculations and round your final answer to 2 decimal places.
Suppose there are no taxes. Firm ABC has no debt, and firm XYZ has debt of $1,000 on which it pays interest of 12% each year. Both companies have identical projects that generate free cash flows of $900 or $1,400 each year. After paying any interest on debt, both companies use all remaining free cash flows to pay dividends each year. a. In the table below, fill in the debt payments and equity dividends each firm will receive given each of the two possible levels of free cash flows. b. Suppose you hold 10% of the equity of ABC. What is another portfolio you could hold that would provide the same cash flows? c. Suppose you hold 10% of the equity of XYZ. If you can borrow at 12%, what is an alternative strategy that would provide the same cash flows? a. In the table below, fill in the payments debt and equity holders of each firm will receive given each of the two possible levels of free cash flows. (Round to the nearest dollar.) АВС XYZ FCF Debt Payments Equity Dividends Debt Payments…
Kohwe Corporation plans to issue equity to raise $50.7 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10.4 million each year. Kohwe's only asset is this investment opportunity. Suppose the appropriate discount rate for Kohwe's future free cash flows is 7.7%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is the value of Kohwe if it finances the investment with equity? a. What is the NPV of Kohwe's investment? The NPV of Kohwe's investment is $ million. (Round to two decimal places.) b. What is the value of Kohwe if it finances the investment with equity? The Kohwe finances stment with equity $ million. (Round decimal places.)
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Calvert Corporation expects an EBIT of $25,100 every year forever. The company currently has no debt, and its cost of equity is 15.2 percent. The company can borrow at 10 percent and the corporate tax rate is 24 percent. a. What is the current value of the company? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)b-1. What will the value of the firm be if the company takes on debt equal to 60 percent of its unlevered value? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)b-2. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)c-1. What will the value of the firm be if the company takes on debt equal to 60 percent of its levered value? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g.,…
11. Please help me to answer this. thank you
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Calvert Corporation expects an EBIT of $25,500 every year forever. The company currently has no debt, and its cost of equity is 15.4 percent. The company can borrow at 10.2 percent and the corporate tax rate is 21 percent. a. What is the current value of the company? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b-1. What will the value of the firm be if the company takes on debt equal to 50 percent of its unlevered value? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) b-2. What will the value of the firm be if the company takes on debt equal to 100 percent of its unlevered value? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.) c-1. What will the value of the firm be if the company takes on debt equal to 50 percent of its levered value? (Do not round intermediate calculations and round your answers to 2 decimal places,…
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Rian Corporation is currently working without using debt. The estimated operating profit per year is $16.065,180.00 while the equity capitalization rate (ke) is 18% pa. In the coming year, Rian is considering replacing some of his shares with a debt of $50 million, with an interest rate of 15% per annum. Question: a. Calculate the value of own capital capitalization (CS), the total capitalization value of the company (V), and the overall capitalization rate (ko) using the Net Income Approach. b. Calculate the amount of equity capitalized value, total capitalization value of the company, and overall capitalization rate using the traditional approach, if additional debt causes the equity capitalization rate (ke) to increase to 20%. c. Draw a graph of the two approaches.

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that they are pretty much alike. In this problem you will need to calculate the value of each company's Equity. Given: Company AAA: Unlevered. Annual income is tax-free. $28.6 million