Answered step by step
Verified Expert Solution
Question
1 Approved Answer
hand work Augustine Aviation Limited is an all equity company with EBIT of $1,137,500 per year which will continue forever as the company pays out
hand work
Augustine Aviation Limited is an all equity company with EBIT of $1,137,500 per year which will continue forever as the company pays out all earnings in the form of dividends (i.e. no growth). As the CFO, you must determine the optimal capital structure for this company. You have been provided with the following additional information: T-bills are currently yielding 2%; the expected return on the market is 8%; the company's tax rate is 40%; and costs of financial distress apply. Assume the market value of debt is equal to its book value. Cost of Debt (Rd) PV of Financial Distress Costs Value of Debt $0 $4,000,000 $6,000,000 5% 7% Beta .75 ? 1.7 $400,000 ? a) b) c) d) e) What is the value and WACC of this all-equity firm? (3 marks) What would be the value of the company if it issues $4 million in debt? (2 marks) What would be the company's Beta if it issues $4 million in debt? (6 marks) What would be the value of the company if it issues $6 million in debt? (5 marks) What would be the PV of financial distress costs if the firm Issues $6 million in debt? (2 marks) Augustine Aviation Limited is an all equity company with EBIT of $1,137,500 per year which will continue forever as the company pays out all earnings in the form of dividends (i.e. no growth). As the CFO, you must determine the optimal capital structure for this company. You have been provided with the following additional information: T-bills are currently yielding 2%; the expected return on the market is 8%; the company's tax rate is 40%; and costs of financial distress apply. Assume the market value of debt is equal to its book value. Cost of Debt (Rd) PV of Financial Distress Costs Value of Debt $0 $4,000,000 $6,000,000 5% 7% Beta .75 ? 1.7 $400,000 ? a) b) c) d) e) What is the value and WACC of this all-equity firm? (3 marks) What would be the value of the company if it issues $4 million in debt? (2 marks) What would be the company's Beta if it issues $4 million in debt? (6 marks) What would be the value of the company if it issues $6 million in debt? (5 marks) What would be the PV of financial distress costs if the firm Issues $6 million in debt? (2 marks) Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started