Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
4th Edition
ISBN: 9780134083278
Author: Jonathan Berk, Peter DeMarzo
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
Chapter 16, Problem 9P
Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn
- a. What is the
NPV of Kohwe’s investment? - b. Given these plans, what is Kohwe’s value per share today? Suppose Kohwe borrows the $50 million instead. The firm will pay interest only on this loan each year, and it will maintain an outstanding balance of $50 million on the loan. Suppose that Kohwe's corporate tax rate is 40%, and expected free cash flows are still $10 million each year.
- c. What is Kohwe’s share price today if the investment is financed with debt? Now suppose that with leverage, Kohwe’s expected free cash flows will decline to $9 million per year due to reduced sales and other financial distress costs. Assume that the appropriate discount rate for Kohwe’s future free cash flows is still 8%.
- d. What is Kohwe’s share price today given the financial distress costs of leverage?
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
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.)
Memo Corporation is about to launch a new product. Depending on the success of the new product, Memo has an equal probability of being worth $140 million, $125 million, $95 million, or $80 million next year. Assume that Memo is not subject to a tax payment and that its opportunity cost of capital is 5%.
a. What is the value of Memo’s equity today if it is 100% financed by equity?Now assume that, instead of being all equity financed, Memo replace some of its equity with zero-coupon debt that has a face value of $100 million which will mature next year. Answer parts b and c under this assumption.
b. What is the value of Memo’s debt today? Continue to assume that Memo’s value with be either $140 million, $125 million, $95 million, or $80 million next year, depending upon the success of the new project.c. What is Memo’s total value today, now that it is levered? Briefly explain your results.
KMS corporation has assets of $650 million, $130 million of which are cash. It has debt of $162.5 million. Suppose that KMS decides to initiate a dividend, but it wants the present value of payout to
be $65 million. If its cost of equity capital is 10.7%, to what amount per year in perpetuity should it commit (assuming perfect capital market)?
KMS should commit to $ million per year. (Round to two decimal places.)
Chapter 16 Solutions
Corporate Finance (4th Edition) (Pearson Series in Finance) - Standalone book
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
- You are considering acquiring a firm that you believe will generate cash flows of $100,000 per year for 10 years, after which you are expecting to sell it for $150,000. You will only use equity financing for this project. The beta of the firm is believed to be .75. Of course, you know these cash flows are uncertain. All these cash flows are subject to a 25% corporate tax rate. a) How much is the firm’s worth if the risk-free rate is 5% and the expected market return is 12%? Show your work. b) If the actual beta of the firm turns out to be .50, by how much will you have valued the firm incorrectly? c) If it turns out that you over-projected the cash flows by 2%, by how much will you have valued the firm incorrectly? Show all of your working. Do not use Excel.arrow_forward) Rendezvous Ltd. expects its EBIT to be $100,000 every year forever. The firm can borrow at 11 percent. Bruce currently has no debt, and its cost of equity is 18 percent. The tax rate is 31 percent. Bruce will borrow $61,000 and use the proceeds to repurchase shares. What will the WACC be after recapitalization?b) Provide at least two circumstances, where interest tax-shield will have no value for a company.c) Your firm has a debt-equity ratio of 0.60. Your cost of equity is 11 percent and your after-tax cost of debt is 7 percent. What will your cost of equity be if the target capital structure becomes a 50/50 mix of debt and equityarrow_forwardHappy 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 millionarrow_forward
- The Redwood Company is financed entirely with equity. The company is considering a loan of $20 million. The loan will be repaid in equal principal instalments over the next two years and has an interest rate of 8 percent. The company's tax rate is 24 percent. Assume there is no default risk. According to MM Proposition I with taxes, show how much firm value increase is attributed to the interest tax shield of the loan? Select an answer that is closest to yours. O $2.4 million O $0.576 million O $0.520 million O $1.6 millionarrow_forwardDynamo Corp. produces annual cash flows of $150 and is expected to exist forever. The company is currently financed with 75 percent equity and 25 percent debt. Your analysis tells you that the appropriate discount rates are 10 percent for the cash flows, and 7 percent for the debt. You currently own 10 percent of the stock. If Dynamo wishes to change its capital structure from 75 percent to 60 percent equity, according to M&M Proposition 1, what are the interest payments that you receive after you undo the restructuring, and what are your total cash flows? (Do not round intermediate calculations. Round the final answer to two decimal places.) O $1.58 and $12.38 O $23.55 and $75 O $1.125 and $12.38 O $23.55 and $12.38arrow_forwardConsider the same two firms U and L- that are identical except for capital structure. Each firm expects EBIT of $650,000 each year forever. Firm U has a cost of equity of 10% and Firm L has $2 million in perpetual debt with a coupon rate of 7%. There is no chance of bankruptcy, but earnings of each are taxed at a rate of 45%. What is the value of equity for Firm L? Select one: a. 3.475m b. 0.475m c. 2.475m d. 1.475marrow_forward
- a) Rendezvous Ltd. expects its EBIT to be $100,000 every yearforever. The firm can borrow at 11 percent. Bruce currently hasno debt, and its cost of equity is 18 percent. The tax rate is31 percent. Bruce will borrow $61,000 and use the proceeds torepurchase shares. What will the WACC be after recapitalization?b) Provide at least two circumstances, where interest tax-shieldwill have no value for a company.c) Your firm has a debt-equity ratio of 0.60. Your cost of equityis 11 percent and your after-tax cost of debt is 7 percent. Whatwill your cost of equity be if the target capital structurebecomes a 50/50 mix of debt and equity?Question 2: 10 marksa) Everystate Inc. is evaluating an extra dividend versus a sharerepurchase. In either case, $9,000 would be spent. Currentearnings are $1.30 per share and the stock currently sells for$64 per share. There are 1,000 shares outstanding. In answeringthe questions that follow, ignore taxes for the first two:i) Evaluate the two choices in terms of…arrow_forwardSolve it correctly please.arrow_forwardThe Redwood Company is financed entirely with equity. The company is considering a loan of $20 million. The loan will be repaid in equal principal instalments over the next two years and has an interest rate of 8 percent. The company's tax rate is 24 percent. Assume there is no default risk. According to MM Proposition I with taxes, show how much firm value increase is attributed to the interest tax shield of the loan? Select an answer that is closest to yours. Group of answer choices $0.520 million $1.6 million $2.4 million $0.576 millionarrow_forward
- Duke Inc. is considering to change its capital structure of a $1 million:$3 million debt-equity mix (in terms of market values), by taking out a $3 million loan which is used to pay a large dividend to shareholders. The firm’s tax rate is 40%. After the dividend has been paid, what will be the firm’s total equity value?arrow_forwardConsider a project of the Cornell Haul Moving Company, the timing and size of the incremental after-tax cash flows (for an all-equity firm) are shown below in millions: Time Cash Flow -$ 990 125 250 375 500 The firm's tax rate is 34 percent; the firm's bonds trade with a yield to maturity of 8 percent; the current and target debt-equity ratio is 2; if the firm were financed entirely with equity, the required return would be 10 percent. What is the levered after-tax incremental cash flow for year 2? 0000 2 3 4 $185,796,000 $215,152,000 $284,848,000 $267,952,000arrow_forwardBruce & Co. expects its EBIT to be $165,000 every year forever. The company currently has no debt but can borrow at 8.6 percent while its cost of equity is 14.7 percent. The tax rate is 21 percent. The company is planning to borrow $55,000 and use the loan proceeds to repurchase shares. What will be the WACC after recapitalization? Select one: 14.57 percent 15.07 percent 14.51 percent 14.11 percent 14.58 percentarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
Discounted cash flow model; Author: Edspira;https://www.youtube.com/watch?v=7PpWneOBJls;License: Standard YouTube License, CC-BY