Question
Here is a simplified balance sheet for Upjohn Company at the end of 2012 (dollars in millions): Current assets $1,418 Current Liabilities $653 Net property,
Here is a simplified balance sheet for Upjohn Company at the end of 2012 (dollars in millions):
Current assets $1,418 Current Liabilities $653
Net property, plant, Long-term debt 457
and equipment 1,240 Deferred taxes 199
Other assets 472 Shareholders equity 1,821
Total 3,130 Total 3,130 Other information: There are 75 million shares of equity outstanding with a per share price of $20 at end of year. The equity has a beta of 1.25. Historical average risk premium is 8.0% per year and the risk-free rate is 2%. Newly issued Upjohn long-term debt carries a spread of 1.5% to the risk-free rate. The companys marginal tax rate is 35%.
- (a) Calculate Upjohns WACC. (hint: Use the CAPM and the data above and only use Long-term debt as debt)
- (b) What would Upjohns WACC be if it moved to and maintained a debt to market value ratio of 30%? As a result, the spread on debt increase to 2%. Assume the only taxes are corporate taxes.
- (c) Now assume that the bondholders and the equityholders have effective tax rates of 30% and 10%, respectively, and the current market price of $20 reflects this capital structure. What would be the total equity value and the per share price if Upjohn were 100% equity finance?
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