Question
I have the answers to these questions but I would like to know how they were solved Ice Cream Sandwich Co. expects EBIT of $200,000
I have the answers to these questions but I would like to know how they were solved
Ice Cream Sandwich Co. expects EBIT of $200,000 every year forever. Ice Cream Sandwich Co. currently has no debt and its cost of equity is 15%. The firm can borrow at 6%. The corporate tax rate is 32%.
a) What is the value of the firm?
- Answer is 906,666.67
b) Given that the firm has a value of $906,666.67 when it is all equity, what will be the value of the firm if Ice Cream Sandwich Co. borrows $200,000of permanent debt and uses the proceeds to buy back stock?
- Answer is 970,666.67
c) Given that the firm has a value of $906,666.67 when it is all equity, how can Ice Cream Sandwich Co. maximize the value of the firm? What will be the maximum value if there are no costs to financial distress?
- Answer is 1,333,333.33
d) Suppose that with $200,000 of debt, there is a 5% probability of financial distress, in which case the firm will have a present value of $210,000. What is the value of the firm in this case?Recall that the value of the firm with $200,000 debt and no costs to financial distress was $970,666.67.
- Answer is 932,633.34
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