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1) Lindbergh Company has the following date related to its capital structure: CASE A CASE B EBIT (in perpetuity): $175,000 EBIT (in perpetuity): $175,000 Rate
1)
Lindbergh Company has the following date related to its capital structure:
CASE A | CASE B | |||
EBIT (in perpetuity): | $175,000 | EBIT (in perpetuity): | $175,000 | |
Rate on debt: | 6.0 % | Rate on debt: | 6.0 % | |
Cost of Equity: | 10.0% | Cost of Equity: | 10.0% | |
Tax Rate: | 35.0% | Tax Rate: | 35.0% | |
Debt: | 0 | Debt: | Borrow $135,000 to buy share | |
Will have debt in perpetuity |
What is the value of unlevered firm (Case A) and the levered firm (Case B)
2)
Prescott Inc. has the following data regarding its financial structure:
Market value of outstanding debt: | $7,000,000 |
Value of firm if financed with all equity: | $18,850,000 |
Number of shares outstanding: | 350,000 |
Current price per share: | $38.00 |
Tax rate: | 35 % |
What is the decrease in firm value due to expected bankruptcy costs?
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