Levered, Incorporated, and Unlevered, Incorporated, are identical in every way except their capital structures. Each company expects to earn $11.1 million before interest per year in perpetuity, with each company distributing all its earnings as dividends. Levered's perpetual debt has a market value of $59 million and costs 5 percent per year. Levered has 1.7 million shares outstanding that sell for $75 per share. Unlevered has no debt and 3.4 million shares outstanding, currently worth $58 per share. Neither firm pays taxes. What is the value of each company's equity? Levered: Unlevered:

Levered, Incorporated, and Unlevered, Incorporated, are identical in every way except their capital structures. Each company expects to earn $11.1 million before interest per year in perpetuity, with each company distributing all its earnings as dividends. Levered's perpetual debt has a market value of $59 million and costs 5 percent per year. Levered has 1.7 million shares outstanding that sell for $75 per share. Unlevered has no debt and 3.4 million shares outstanding, currently worth $58 per share. Neither firm pays taxes. What is the value of each company's equity? Levered: Unlevered:

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Schwartz Ltd and Wolfrum Ltd are identical in all aspects except their capital structures. Schwartz Ltd is 100% equity financed and has an after-tax unlevered cost of equity (ku) of 20%. Its current before interest and after tax cash earnings (Xo) are $150,000, which are expected to grow at 3% per annum forever. Wolfrum Ltd has $300,000 of debt in its capital structure and expects to maintain this level of debt permanently. Assume the corporate tax rate for both companies is 30% and the cost of debt (kd) is 7% p.a. Assume Miller and Modigliani (MM) perfect capital markets with no taxes. What is the value of Wolfrum Ltd? What is the WACC for Wolfrum Ltd? Now consider a Miller and Modigliani (MM) perfect capital markets with corporate taxes world: (i) What is the value of the tax subsidy, and what is the value of Wolfrum Ltd? What is the value of equity and the WACC for Wolfrum Ltd?
AAA Corporation and BBB Corporation are identical in every way except their capital structures. AAA Corporation, an all-equity firm, has 45 million shares of stock outstanding, currently worth $50 per share. BBB Corporation uses leverage in its capital structure. The market value of BBB’s debt is $400mil., and its cost of debt is 3.5 percent. Each firm is expected to have earnings before interest and tax of $155mil. in perpetuity. Assume that every investor can borrow at 3.5 percent per year. Corporate tax rate is 35%. Q18. BBB is about to undertake a new project. Initial outlay for the project is $1.5 billion. The project is expected to generate annual after-tax free cash flows of $65 million indefinitely. If the project has similar risk characteristics to those of BBB company as a whole, and if it could be financed with the same financing proportions that the company currently uses, what would be the project’s net present value (NPV)? (with the rounding, choose the answer that is…
AAA Corporation and BBB Corporation are identical in every way except their capital structures. AAA Corporation, an all-equity firm, has 30 million shares of stock outstanding, currently worth $55 per share. BBB Corporation uses leverage in its capital structure. The market value of BBB’s debt is $400mil., and its cost of debt is 4.5 percent. Each firm is expected to have earnings before interest and tax of $165mil. in perpetuity. Assume that every investor can borrow at 4.5 percent per year. Corporate tax rate is 40%. Q14. How much will it cost to purchase 20% of BBB's equity?
AAA Corporation and BBB Corporation are identical in every way except their capital structures. AAA Corporation, an all-equity firm, has 40million shares of stock outstanding, currently worth $15 per share. BBB Corporation uses leverage in its capital structure. The market value of BBB’s debt is $100million and its cost of debt is 6.7 percent. Each firm is expected to have earnings before interest of $200 million in perpetuity. Assume that every investor can borrow at 6.7 percent per year. Corporate tax rate is 35%. (SHOW YOUR WORK) 1). What is the value of AAA Corporation? 2). What is the value of BBB Corporation? 3). What is the market value of BBB Corporation’s equity? 4). What would be the BBB’s cost of equity (Rs)? 5). What would be BBB’s weighted average cost of capital (WACC)?
Alpha Ltd and Omega Ltd are identical in all aspects except their capital structures. Alpha Ltd is 100% equity financed. It has 1 million shares outstanding and an unlevered cost of equity of 12%. Alpha’s current before interest and after tax cash earnings are $180,000, which are expected to grow at a constant rate of 3% per year indefinitely. Omega Ltd has 500,000 shares outstanding and $60,000 in debt in its capital structure at an interest rate of 7% p.a. Omega expects to maintain this level of debt permanently. Assume Miller and Modigliani (MM) perfect capital markets with no taxes and that firms and individuals can borrow and lend at the same 7% rate as Omega. What is the WACC for Omega Ltd? According to MM Proposition 1, what is the stock price for Omega Ltd?…
Alpha Corporation and Beta Corporation are identical in every way except their capital structures. Alpha Corporation, an all equity firm, has 15,000 shares of stock outstanding, currently worth GH¢ 30 per share. Beta Corporation uses leverage in its capital structure. The market value of Beta’s debt is GH¢ 65,000 and its cost of debt is 9 percent. Each firm is expected to have earnings before interest of GH¢ 75,000 in perpetuity. Neither firm pays taxes. Assume that every investor can borrow at 9 percent per year. What is the value of Alpha Corporation? What is the value of Beta Corporation? What is the market value of Beta Corporation’s equity?
CELFIN CAPITAL generates pre-tax operating cash flows (asset flows) of MM$ 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.
Currently, the Bright Ltd is an all-equity company. Earnings before interest and taxes (EBIT) for the company is expected to be $73,084 forever, and the cost of capital is currently 14.16 percent. The Chief Financial Officer (CFO) of the Bright Ltd Company is interested to identify the cost of capital and value of the company. The corporate tax rate applicable to this company is 34.0 percent. A). Calculate the market value of Bright Ltd. Round your answer to 2 decimal points. B). Suppose Bright Ltd floats a $30,397 debt issue and uses the proceeds to reduce share capital. The interest rate is 9.75 percent. Calculate the new value of the business. Round your answer to 2 decimal points. C). Calculate the new value of equity. Round your answer to 2 decimal points.
Maddux Corporation has an EBIT of $835,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 16 percent and the corporate tax rate is 21 percent. The company also has a perpetual bond issue outstanding with a market value of $2.1 million. What is the value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) Value of the company
Morrow Corp. has an EBIT of $935,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 14 percent and the corporate tax rate is 21 percent. The company also has a perpetual bond issue outstanding with a market value of $2.6 million. What is the value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.. 1,234,567.89)
Maddux Corporation has an EBIT of $905,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 11 percent and the corporate tax rate is 23 percent. The company also has a perpetual bond issue outstanding with a market value of $2.45 million. What is the value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) Value of the company The CFO of the company informs the company president that the value of the company is $6.1 million. Is the CFO correct? Is the CFO correct?
Maddux Corporation has EBIT of $725,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 11 percent and the corporate tax rate is 24 percent. The company also has a perpetual bond issue outstanding with a market value of $1.6 million. What is the value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) The CFO of the company informs the company president that the value of the company is $4.9 million. Is the CFO correct?

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