Use below information for following two questions (Q24-Q25). AAA Corporation and BBB Corporation are identical in every way except their capital structures. AAA Corporation, an all-equity firm, has 35 million shares of stock outstanding, currently worth $25 per share. BBB Corporation uses leverage in its capital structure. The market value of BBB’s debt is $250mil., and its cost of debt is 3.5 percent. Each firm is expected to have earnings before interest and tax of $175mil. in perpetuity. Assume that every investor can borrow at 3.5 percent per year. Corporate tax rate is 35% and personal tax rate on bond interest income is 30%. Q24. What is the value of BBB corporations? $833.33 mil. $892.86 mil. $875 mil. $642.86 mil. $962.5 mil.
Use below information for following two questions (Q24-Q25).
AAA Corporation and BBB Corporation are identical in every way except their capital structures. AAA Corporation, an all-equity firm, has 35 million shares of stock outstanding, currently worth $25 per share. BBB Corporation uses leverage in its capital structure. The market value of BBB’s debt is $250mil., and its cost of debt is 3.5 percent. Each firm is expected to have earnings before interest and tax of $175mil. in perpetuity. Assume that every investor can borrow at 3.5 percent per year. Corporate tax rate is 35% and personal tax rate on bond interest income is 30%.
Q24. What is the value of BBB corporations?
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$833.33 mil. |
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$892.86 mil. |
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$875 mil. |
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$642.86 mil. |
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$962.5 mil. |
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