Question
ABC Limited is considering issuing $10,000,000 worth of perpetual bonds yielding $600,000 interest per year. ABC currently has no debt outstanding and will use the
ABC Limited is considering issuing $10,000,000 worth of perpetual bonds yielding $600,000 interest per year. ABC currently has no debt outstanding and will use the bond proceeds to repurchase equity. ABC has 100% dividend payout ratio and EBIT is $2,000,000 per year forever. Corporate tax rate is 30%.
- If the personal tax rate is 28%, which plan (all equity or debt + equity) offers the investors the highest cash flows? Why?
- If the shareholders require a 15% return before personal taxes, what is the value of the firm under each plan? (Do not ignore personal taxes).
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Valuation Measuring and managing the values of companies
Authors: Mckinsey, Tim Koller, Marc Goedhart, David Wessel
5th edition
978-0470424650, 9780470889930, 470424656, 470889934, 978-047042470
