Question
Fresno Industries is in the 21% corporate tax bracket. Its unlevered cost of capital is 10.5%. The company has a policy of payout all of
Fresno Industries is in the 21% corporate tax bracket. Its unlevered cost of capital is 10.5%. The company has a policy of payout all of its earnings in dividends at the end of each year. Fresno just issued $325,000 of perpetual 7 percent debt. With the proceeds, it repurchased it stock. The company expects to generate $146,000 of earnings before interest and taxes in perpetuity.
a. What is the value of the company as an unlevered firm?
b. Use the adjusted present value method to calculate the value of the company with leverage.
c. What is the required return on the firms levered equity?
d. Use the flow to equity method to calculate the value of the companys equity.
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