IN CAPITAL generates pre-tax operating cash flows (asset flows) of MM$ 4,000 per year in perpetuity. The market value of its debt is MM$ 8,000, which is in perpetuity and risk-free, with an associated cost of debt (kb) rate of 4% (and which trades at 115% at par). The required shareholder return is 20%. The number of shares in the company is 200,000,000. Assuming a world with corporate taxes of 25%: (a) Calculate the value of the firm, its share price, its cost of capital without debt, its weighted average cost of capital, and shareholder wealth. (b) Suppose that the company decides to change its target capital structure and for this purpose repurchases debt, issuing new shares for a total of MM$ 2,000. Determine the new price per share, final number of shares, firm value, equity cost, weighted average cost of capital of the firm and s
CELFIN CAPITAL generates pre-tax operating cash flows (asset flows) of MM$ 4,000 per year in perpetuity. The market value of its debt is MM$ 8,000, which is in perpetuity and risk-free, with an associated cost of debt (kb) rate of 4% (and which trades at 115% at par). The required shareholder return is 20%. The number of shares in the company is 200,000,000. Assuming a world with corporate taxes of 25%:
(a) Calculate the value of the firm, its share price, its cost of capital without debt, its weighted average cost of capital, and shareholder wealth.
(b) Suppose that the company decides to change its target capital structure and for this purpose repurchases debt, issuing new shares for a total of MM$ 2,000. Determine the new price per share, final number of shares, firm value, equity cost, weighted average cost of capital of the firm and shareholder wealth after the capital structure change. Finally, explain the amount of the change in wealth.
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Two questions:
1) Why 25% tax rate in statement not considered for incorporation into cost of debt? i.e. kd x (1 - tax%)
2) Does it influence the calculations that the debt rate (kd) is transe at 115% at par?
Please respond as soon as possible ASAP
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