EBK CORPORATE FINANCE
4th Edition
ISBN: 8220103164535
Author: DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 16, Problem 14P
Marpor Industries has no debt and expects to generate
- a. Estimate Marpor’s value without leverage.
- b. Estimate Marpor’s value with the new leverage.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Marpor Industries has no debt and expects to generate free cash flows of $16.82 million each year. Marpor believes that if it permanently increases its level of debt to $35.60 million, the risk of
financial distress may cause it to lose some customers and receive less favourable terms from its suppliers. As a result, Marpor's expected free cash flows with debt will be only $15.32 million per
year. Suppose Marpor's tax rate is 25%, the risk-free rate is 6%, the expected return of the market is 12%, and the beta of Marpor's free cash flows is 1.10 (with or without leverage).
a. Estimate Marpor's value without leverage.
b. Estimate Marpor's value with the new leverage.
Vijay
Happy Time Inc. is expected to generate the following cash flows for the next year, as shown in the table
below. Happy Time now only has one outstanding debt with a face value of $110 million to be repaid in the
next year. The current market value for the debt is $67 million. The tax rate is zero. If you invest in the
corporate debt of Happy Time Inc. today, what is your expected percentage return on this investment?
Cash flow in the next year
Economy Probability Amount
Boom
0.3
Normal 0.4
Recession 0.3
O 36.87%
O -26.37%
64.8%
O-16.63%
$110 million
$101 million
$61 million
Chapter 16 Solutions
EBK CORPORATE FINANCE
Ch. 16.1 - Prob. 1CCCh. 16.1 - Does the risk of default reduce the value of the...Ch. 16.2 - If a firm files for bankruptcy under Chapter 11 of...Ch. 16.2 - Why are the losses of debt holders whose claims...Ch. 16.3 - Prob. 1CCCh. 16.3 - True or False: If bankruptcy costs are only...Ch. 16.4 - Prob. 1CCCh. 16.4 - According to the trade-off theory, all else being...Ch. 16.5 - Prob. 1CCCh. 16.5 - Why would debt holders desire covenants that...
Ch. 16.6 - Prob. 1CCCh. 16.6 - Prob. 2CCCh. 16.7 - Coca-Cola Enterprises is almost 50% debt financed...Ch. 16.7 - Why would a firm with excessive leverage not...Ch. 16.7 - Describe how management entrenchment can affect...Ch. 16.8 - How does asymmetric information explain the...Ch. 16.8 - Prob. 2CCCh. 16.9 - Prob. 1CCCh. 16.9 - Prob. 2CCCh. 16 - Gladstone Corporation is about to launch a new...Ch. 16 - Baruk Industries has no cash and a debt obligation...Ch. 16 - When a firm defaults on its debt, debt holders...Ch. 16 - Prob. 4PCh. 16 - Prob. 5PCh. 16 - Suppose Tefco Corp. has a value of 100 million if...Ch. 16 - You have received two job offers. Firm A offers to...Ch. 16 - As in Problem 1, Gladstone Corporation is about to...Ch. 16 - Kohwe Corporation plans to issue equity to raise...Ch. 16 - Prob. 10PCh. 16 - Prob. 11PCh. 16 - Hawar International is a shipping firm with a...Ch. 16 - Your firm is considering issuing one-year debt,...Ch. 16 - Marpor Industries has no debt and expects to...Ch. 16 - Real estate purchases are often financed with at...Ch. 16 - On May 14, 2008, General Motors paid a dividend of...Ch. 16 - Prob. 17PCh. 16 - Consider a firm whose only asset is a plot of...Ch. 16 - Prob. 19PCh. 16 - Prob. 20PCh. 16 - Prob. 21PCh. 16 - Consider the setting of Problem 21 , and suppose...Ch. 16 - Consider the setting of Problems 21 and 22, and...Ch. 16 - You own your own firm, and you want to raise 30...Ch. 16 - Empire Industries forecasts net income this coming...Ch. 16 - Ralston Enterprises has assets that will have a...Ch. 16 - Prob. 27PCh. 16 - If it is managed efficiently, Remel Inc. will have...Ch. 16 - Which of the following industries have low optimal...Ch. 16 - According to the managerial entrenchment theory,...Ch. 16 - Info Systems Technology (IST) manufactures...Ch. 16 - Prob. 32PCh. 16 - Prob. 33P
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Arnell Industries has 5.5 million in permanent debt outstanding. The firm will pay interest only on this debt. Arnell's marginal tax rate is expected to be 40% for the foreseeable future. a. Suppose Arnell pays interest of 9% per year on its debt. What is its annual interest tax shield? b. What is the present value of the interest tax shield, assuming its risk is the same as the loan? c. Suppose instead the interest rate on the debt were 7%. What is the present value of the interest tax shield in this case?arrow_forwardMilton Industries expects free cash flows of $4 million each year. Milton's corporate tax rate is 30%, and its unlevered cost of capital is 12%. Milton also has outstanding debt of $24.27 million, and it expects to maintain this level of debt permanently. a. What is the value of Milton Industries without leverage? b. What is the value of Milton Industries with leverage? a. What is the value of Milton Industries without leverage? The value of Milton Industries without leverage is $ 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.)arrow_forwardMilton 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)arrow_forward
- Happy Time Inc. is expected to generate the following cash flows for the next year, as shown in the table below. Happy Time now only has one outstanding debt with a face value of $110 million to be repaid in the next year. The current market value for the debt is $67 million. The tax rate is zero. If the firm is financed by common equity and debt, what is the expected value of common equity next year? Cash flow in the next year Probability Amount Economy Boom 0.3 $110 million Normal 0.4 $101 million Recession 0.3 $61 million $26.8 million $24.7 million $0 -$18.3 millionarrow_forwardPlease solve the below with detailed explanationarrow_forwardIn year 1, AMC will earn $2,200 before interest and taxes. The market expects these earnings to grow at a rate of 3.3% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 25%. Right now, the firm has $5,500 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 3.3% per year. Suppose the risk-free rate equals 5.5%, and the expected return on the market equals 12.1%. The asset beta for this industry is 1.41. a. If AMC were an all-equity (unlevered) firm, what would its market value be? b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC's debt is expected to grow by 3.3% per year, at what rate are its interest payments expected to grow? c. Even though AMC's debt is riskless (the firm will not default), the future growth of AMC's debt is…arrow_forward
- Radubhaiarrow_forwardFountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm’s only activity and that the firm will close one year from today. The company is obligated to make a $4,100 payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects: Economy Probability Low-Volatility Project Payoff High-Volatility Project Payoff Bad .50 $ 4,100 $ 3,500 Good .50 4,600 5,200 a. What is the expected value of the company if the low-volatility project is undertaken? The high-volatility project? (Do not round intermediate calculations and round your answers to the nearest whole number, e.g., 32.) b. What is the expected value of the…arrow_forwardFountain Corporation’s economists estimate that a good business environment and a bad business environment are equally likely for the coming year. The managers of the company must choose between two mutually exclusive projects. Assume that the project the company chooses will be the firm’s only activity and that the firm will close one year from today. The company is obligated to make a $4,200 payment to bondholders at the end of the year. The projects have the same systematic risk but different volatilities. Consider the following information pertaining to the two projects: Economy Probability Low-Volatility Project Payoff High-Volatility Project Payoff Bad .50 $ 4,200 $ 3,400 Good .50 4,600 4,900 a. What is the expected value of the company if the low-volatility project is undertaken? What if the high-volatility project is undertaken? (Do not round intermediate calculations.) b. What is the expected value of the company’s equity if the low-volatility…arrow_forward
- In year 1, AMC will earn $2,900 before interest and taxes. The market expects these earnings to grow at a rate of 2.7% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 45%. Right now, the firm has $7,250 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 2.7% per year. Suppose the risk-free rate equals 4.5%, and the expected return on the market equals 9.9%. The asset beta for this industry is 1.93. Using the WACC, the expected return for AMC equity is 25.71%. Assuming that the proceeds from any increases in debt are paid out to equity holders, what cash flows do the equity holders expect to receive in one year? At what rate are those cash flows expected to grow using the FTE method? (Hold all intermediate calculations to at least 6 decimal places and round to the…arrow_forwardIn year 1, AMC will earn $2,900 before interest and taxes. The market expects these earnings to grow at a rate of 2.7% per year. The firm will make no net investments (i.e., capital expenditures will equal depreciation) or changes to net working capital. Assume that the corporate tax rate equals 45%. Right now, the firm has $7,250 in risk-free debt. It plans to keep a constant ratio of debt to equity every year, so that on average the debt will also grow by 2.7% per year. Suppose the risk-free rate equals 4.5%, and the expected return on the market equals 9.9%. The asset beta for this industry is 1.93. a. If AMC were an all-equity (unlevered) firm, what would its market value be? (Hold all intermediate calculations to at least 6 decimal places and round to the nearest cent.) b. Assuming the debt is fairly priced, what is the amount of interest AMC will pay next year? If AMC's debt is expected to grow by 2.7% per year, at what rate are its interest payments expected…arrow_forwardA firm is considering a project that will generate perpetual after-tax cash flows of $16,500 per year beginning next year. The project has the same risk as the firm's overall operations and must be financed externally. Equity flotation costs 14 percent and debt issues cost 3 percent on an after-tax basis. The firm's D/E ratio is 0.5. What is the most the firm can pay for the project and still earn its required return? Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar. Maximum the firm can payarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Inventory management; Author: The Finance Storyteller;https://www.youtube.com/watch?v=DZhHSR4_9B4;License: Standard Youtube License