Question
Hello I need help with this: Problem 1 (25%) The firm Recap Inc. is today (just before t=0) an all equity firm (the firm has
Hello I need help with this:
Problem 1 (25%) The firm Recap Inc. is today (just before t=0) an all equity firm (the firm has no debt) All outstanding shares of the firm are listed on the Stock Exchange. The number of outstanding shares is 17 million. The market price of a share is today (just before t=0) DKK 16,25. The firm is now (t=0) considering publishing a recapitalization plan for the firm. The plan entails that the company at t=0 will take out a perpetuity loan1 at a price equal to DKK 100 per DKK 100 in face value2. The principal of the loan is 28 million. There are no transaction costs (fees, commissions etc.) related to the debt. After this, the firm will forever refrain from taking out any further debts. The proceeds from the loan will be used to repurchase some of the existing shares in the firm immediately after t=0. The firm's marginal tax rate is assumed to remain constant at 20%. It is also assumed that corporate tax is the only imperfection in the capital market and that the firm does not have excess cash. Furthermore, it can be assumed that the firm's EBIT in all periods exceeds interest costs, which are fully deductible.
Problem 1.1 Calculate the market value of the firms unlevered assets (firm value) just before the public disclosure of the recapitalization plan. Prepare an overview of the firm's main groups of assets and liabilities and their values at this specific time.
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