Question
Mojito Mint Company has a debt-equity ratio of 0.45. The required return on the companys unlevered (ungeared) equity is 17 per cent, and the pre-tax
Mojito Mint Company has a debt-equity ratio of 0.45. The required return on the companys unlevered (ungeared) equity is 17 per cent, and the pre-tax cost of the firms debt is 9 per cent. Sales revenue for the company is expected to remain stable indefinitely at last years level of GH23,500,000. Variable costs amount to 60 per cent of sales. The tax rate is 28 per cent, and the company distributes all its earnings as dividends at the end of each year.
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(a) Ifthecompanywerefinancedentirelybyequity,howmuchwoulditbeworth?
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(b) What is the required return on the firms levered (geared) equity?
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(c) Use the weighted average cost of capital method to value the company. What is the value of the companys equity? What is the value of the companys debt?
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