I have a couple of questions I am having a hard time to answer, can someone help by 1:00 pm ET

Here is what I have completed so far, but as requested there is a couple of answers I am stuck on please help!!

What happens if the corporate tax rate is 0%. If you could check answers 10,11,12, and thirteen that would be great

BUS321 Advanced Corporate Finance and Modelling

Capital Structure Case Study

Potfooler, Inc. is a well-known Lower Fantasia company. Here are some facts about the company:

Potfooler expects to have an annual free cash flow (FCF) of $2 million at the end of years 1, 2, 3, forever. Potfooler currently has 100,000 shares outstanding on the Lower Fantasia stock exchange. The Potfooler share price is $100 per share. Potfooler currently has no debt. However, a financial analyst has suggested that the company issue $3,000,000 of perpetual debt and use the proceeds to repurchase shares. Corporate tax rate is 40%.

Question1: What is the current market value of Potfooler?

In the fact section, it states that Potfooler has 100,000 shares that are outstanding at this time, that are worth 100.00 each. Potfooolers equity value presently stands at $10,000,000 = 100,000 * $100.00 per share = It states in the facts that the company has no debt currently, so this tells us that the 10,000,000 is its market value at this time.

Vu=10,000,000

Question 2: After Potfooler issues $3,000,000 of debt, what will be its market value?

We have knowledge that Lower Fantasia only has a corporate income tax rate, so the relation VL=Vu + Tc*D will hold

The market value will be =10,000,000 + 40% *3,000,000 = 11,200,000

Question 3: After Potfooler issues debt of $3,000,000 and uses the proceeds to repurchase shares, what will be the companys total equity value?

After Potfooler issues debt and then repurchases these shares. The total value of its equity E plus the total value of their debt D, this needs to sum to the companys total equity value VL. Equation below:

VL = E+D = 11,200,000

D = 3,000,000

E = VL-D = 11,200,000 3,000,000 = 8,200,000

Question 4: At what price will Potfooler repurchase its shares?

If we look at what has taken place, we can see that Potfooler has increased its total market value by $1,200,000 (10 million to 11.2 million) by issuing 3,000,000 in debt. We know that there are

the 100,000 shares outstanding before the share repurchase, so each shares price increases by $12.00, thus 1,200,000/100,000 = $12.00 The share price after repurchasing is $112.00

Question 5: How many shares will Potfooler repurchase?

Potfooler can repurchase shares at $112.00 per share, they issued 3,000,000 in debt to repurchase shares, so the equation is debt used for repurchase / new share value. $3,000,000/$112 = 26,785.71

Question 6: What was Potfoolers cost of equity before the repurchasing of shares?

As given in the information above, the annual free cash flow for Potfooler is (FCF) of 2,000,000, being unlevered. Ru = FCF / Vu = 2,000,000/10,000,000 = 20%

Question 7: What is Potfoolers cost of equity after the repurchase of the shares on the open market?

We have 3,000,000 @ 8% debt to repurchase the shares. The annual interest bill is at 8% * 3,000,000 = $240,000. The annual cash flow, after interest = FCF (1-Tc) * interest, thus being 2,000,000-(1-40%) * $240,000 = $1,856,000, then, re (L) = [FCF (1-Tc) * interest] / [value of equity, E] =1856,000 / 8,200,000 = 22.63%

Question 8: Whats is Potfoolers WACC before the repurchase of the shares?

We know (WACC) means weighted average cost of capital, what was it before the repurchase of the shares. Well we have figured this previously in question 6. It is the ru, which is 20%

Question 9: What is Potfoolers WACC after the repurchase of the shares?

% of equity in Potfooler = E / (E + D) 8,200,000 / 8,200,000 + 3,000,000 = 73.21%

% of debt in Potfooler = D / (E + D) 3,000,000 / 8,200,000 + 3,000,000 = 26.79%

WACC = rE (l) * E / (e +D + rD * (1-Tc) * D /(E + D)

=22.63% * 8,200,000/8,200,000 + 3,000,000 +8% * (1-40%) 3,000,000 / 8,200,000 + 3,000,000 = 17.86%

Question 10: Why is RE > RU?

Because the only risk prior to Potfooler issued its bonds to shareholders was the companys free cash flow After the fact that potfooler issues its bonds, shareholder is looking at financial, as well as business risk. Re (L) represents cash flows at a discounted rate, which is riskier than the discount rate for the FCF.

Knowing that cash flows are riskier and have higher discounted rates, show rE (L) > ru.

Question 11: Why dos the market value of Potfooler increase after the issuance of the debt and repurchase of the equity?

When issuing the debt, potfoolers shareholders get an additional annual cash flow, which would be the tax shield on the interest debt. The tax shield has no risk involved.

Question 12: Why does the WACC decrease after the repurchase?

After Potfooler issues its debt, it gains an additional cash flow as the previous question states (it is called the tax shield on the interest) We know that there is no risk involved. The average risk of the companys total cash flow and its FCF and the interest tax shield will decrease. It decreases because the WACC represents the average risk of the company.

Question 13: What happens if the corporate tax rate is 0%?