Hi, please help me answer these questions with the relevant detailed workings/formula where necessary. This is from a Financial Management course FIN303. Thanks!
\fQuentin]: 3 {41} marks) Debt-free, Inc., an unlevered rm. is planning tc use debt in its capital structure. The rm cutrently has iii-III} shares cutstanding trading at $611} per share. The rm plans tc sell 151!) 15% annual-ccupcm ll-year b-cnds at their face values cf ELWD each and use the prcceeds tc repurchase same cf its shares. 1When the bends mature. Debt-free, Inc. plans tc reissue new bonds tc pay c' tlte principal and tc \"rcll cver" its debt tltis way indenitely. Amume the rm's ccst cf debt dces nct change and there are nc ccsts cf nancial distre. Earnings befcre interest and tax are expected tc remain at $2 E per year fcrever and the rm has a dividend pclicy cf paying cut all cf in earnings. Maureen currently cwns 1th} shares cf Debt- free, Inc. {H} {b} {i} {ii} {iii} {it} {1"} Calculate the tctal dcllar annual dividend Maureen receives under the rm*s exisng capital structure. {3 marks] If the market learns cf the capital resuuctung befcre tlte exercise is ccmpleted. hctv many shares are repurchased under the planned capital restructuring? {4marl:s] Calculate tctal dcllar annual dividend Maureen receives under the rm's planned capital structure. {4 marks] Debt-free. Inc. ccmpletes its planned capital resuuctuting but Maureen prefers the annual dividend paycut cf the unlevered rm. 1What is Maureen"s cash ctv frcm hcmemade levetage by referencing the levered ntfs capital suucture and assuming tltat she can b-crrcw and lend at tlte same rate as the rm? {1' marks] Is capital structure itrelevant? Explain. {2 marks] Redc part {a} assuming a cne-tier ccrpcrate tax rate cf 2px applies. Igncre perscnal inccme taxes. {in marks] The project under consideration entails an ititial infrastructural invtment of rm million. and subsequent investments of the same amount every ve years. These aets will be depreciated on a straight-line basis to a book value of zero ve years from the purchase. but can be salvaged for approximately half the original investment amount. Revenue for the next year is projected to be $30!} million. and is expected to grotv at an annual rate of2'l'. for four years {i.e.. years 2 through 5]. after which revenues are expected to remain at that level indenitely. Annual variable costs and year-end net working capial aociated tv'lh the project are estimated to be 3t}??- and [(1% of annual revenue respectively. and xed costs are estimated to be t} million per year. Neither the debt nor equity ofT. Holdings is traded. but 5. Corp reckons they are worth $3 billion and $15 billion rapectively. In the immediate future. T. Holdings intends to recapitalize by iuing equity to repay all of their outstanding debt. In addition. 5. Corp looked into Good Inc. and Bad Inc.the former is a conglomerate with businesses such as global telecommunications. food and beverage. and nancial services. whereas the latter is a pure-play tvltich focttses on developing their telecommunications busine in the Asia- Pacic. Also. 5. Corp provides the following information on these entiti: Militias. Beta Lit} l.2l'.lI Market value of equity $ III} billion $4 billion Market value of debt $2!!!I billion $2 billion Face value of debt $22 billion $2.2 billion Years to debt maturity l5 5 Annual coupon rate III}??- 3% The prevailing corporate marginal tax rate is 2%. the expected return on the market portfolio is [5%. and the risk-free rate is 5%. Assume the ntfs cost ofdebt does not vary with capital structure and nancial distress is costlm. (El (ii (iii (hi {i} {ii} [iii] {it-'1 Calculate and justify a suitable weighted average cost of capital based on T. Holdings* existing capital structure. {3 marks] Justify and calculate a suitable discount rate for the telecommunications trait-- {ti marks] Compute operating cadt flows ar the rst ve years. {lmarks} Compute changes in net working capital for the rst ve years. {4 marks] Compute l'wlP'itIIr based on cadt otv from aets for the rst ve years. {4 marks] Should T. Holdings accept the telecommunications project"!I {3 marks]
