Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Assume that a company is expected to produce EBITDA of $90M in perpetuity. The corporate tax rate the company is subject to is 35%. To

Assume that a company is expected to produce EBITDA of $90M in perpetuity. The corporate tax rate the company is subject to is 35%. To maintain the existing production capacities, capital expenditures are expected to be at $10M per year, in perpetuity. Annual depreciation, expected in perpetuity as well, is $10M. The current risk-free rate is 3%, and it is expected to remain so in perpetuity. The company has $200M in long-term debt, which is considered by the bank to be risk-free, so the interest rate the firm pays on its debt is 3%. The company expects to hold that amount of debt in perpetuity. Using stock returns on a comparable company that operates in the same industry, and has debt outstanding equal to 40% of the market value of its total capital, analysts estimated that the comparable companys beta is 1.8. The analysts believe the companies are comparable in all respects except for the capital structure, and do not expect that beta to change over time. You also know that the estimate of the market risk premium for the foreseeable future is 5%. Assume that the probability of financial distress for the firm is negligible, so that you can disregard it.

Calculate the total value of the firm.

__________________

Calculate the value of the firms equity.

__________________

Calculate the weighted average cost of capital (WACC) the firm should use when evaluating new projects in its industry.

__________________

Assume that the firm decided to issue additional debt in the amount of $150M. Also assume that the risk of the firms debt would not change due to the issuance of new debt.

What do you expect the value of the firms equity to be if the company were to issue new debt and use the proceeds from this debt issue to repurchase equity?

__________________

What price would the firm repurchase the equity at, assuming the firm has 90K common shares outstanding?

__________________

Calculate the new, post-restructuring WACC.

__________________

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Dividend Stocks For Dummies

Authors: Lawrence Carrel

1st Edition

0470466014, 978-0470466018

More Books

Students also viewed these Finance questions

Question

fscanf retums a special value EOF that stands for...

Answered: 1 week ago

Question

What does the start( ) method defined by Thread do?

Answered: 1 week ago

Question

Prepare and properly label figures and tables for written reports.

Answered: 1 week ago