19. (Part 1) Hitachi Heavy Equipment Manufacturers is planning to repurchase shares of common stock with the proceeds of a $50 million permanent debt issue. The coupon rate and yield of the debt issue is expected to be 10%. Currently, Hitachi is unlevered with 10 million common shares outstanding. Pre-tax operating income (EBIT) is $100 million. The equity currently has an (unlevered) required return of 20%. Assuming the companys tax rate is 40%, there are no personal taxes or financial distress costs, and all cash flows are level perpetuities, answer the following questions:

a. Compute the companys total market value before the debt issue and stock repurchase. (Do not round intermediate calculations. Express your answer in whole millions of dollars.)

b. Compute the companys share price before the debt issue and stock repurchase. (Do not round intermediate results. Express your answer rounded to whole dollars.)

c. Compute the companys total market value (debt plus equity) after the debt issue and stock repurchase. (Do not round intermediate results. Express your answer in whole millions of dollars.)

d. Compute the companys share price after the debt issue and stock repurchase. (Do not round intermediate results. Express your answer rounded to whole dollars.)

e. What price is paid for the shares repurchased? (Do not round intermediate results. Express your answer rounded to whole dollars.)

f. What is the total value of the firms equity after the repurchase? (Do not round intermediate results. Express your answer in whole millions of dollars.)

	I.	a: 300 b: 30 c: 320 d: 32 e: 30 f: 270
	II.	a: 300 b: 30 c: 320 d: 32 e: 32 f: 270
	III.	a: 500 b: 50 c: 520 d: 52 e: 52 f: 470
	IV.	a: 100 b: 10 c: 120 d: 12 e: 12 f: 70

20. (Part 2) Hitachi Heavy Equipment Manufacturers is planning to repurchase shares of common stock with the proceeds of a $50 million permanent debt issue. The coupon rate and yield of the debt issue is expected to be 10%. Currently, Hitachi is unlevered with 10 million common shares outstanding. Pre-tax operating income (EBIT) is $100 million. The equity currently has an (unlevered) required return of 20%. Assuming the companys tax rate is 40%, there are no personal taxes or financial distress costs, and all cash flows are level perpetuities, answer the following questions:

Now assume the expected future costs of bankruptcy from default have a present value equal to 20% of the value of the debt.

a. Compute the companys total market value (debt plus equity) after the debt issue and stock repurchase. (Do not round intermediate results. Express your answer in whole millions of dollars.)

b. Compute the companys share price after the debt issue and stock repurchase. (Do not round intermediate results. Express your answer rounded to whole dollars.)

		a: 300 b: 30
		a: 320 b: 32
		a: 310 b: 31
		a: 290 b: 29

21. Suppose high-grade taxable bonds trade at a 5% yield and high-grade tax exempt municipal bonds with the same maturity trade at a 3.5% yield. If both bonds trade at par and corporations pay taxes at 40% and individuals pay taxes at 15% on equity, what is the PV(Interest Tax Shields) per dollar of debt?

HINT: You need to estimate the personal tax rate on interest income.

	a.	0.2714
	b.	0.0150
	c.	0.1250
	d.	0.2514

22. Deep See Ventures, a glass bottom boat company in Key Largo and several islands in the Caribbean, currently has an all-equity capital structure. It has expected (perpetual) pre-tax operating income (EBIT) of $100,000 per year and a corporate tax rate of 40%. The personal tax rate on debt is 30% and the personal tax rate on equity is 15%. Assuming no financial distress costs, answer the following questions.

1. If equity investors currently require an (unlevered) 12% return on their after-tax cash flows, what is the current market value of Deep See? (Do not round intermediate results. Express your answer in whole dollars.)

2. What is the new total firm market value if Deep See recapitalizes the firm by borrowing $200,000 as perpetual debt. (Do not round intermediate results and provide your answer in whole dollars.)

c. If you learned that the debt is risky and a large proportion of the assets are intangible, would you revise up or down the benefit from leverage calculated in b.?

	I.	a: 833,333 b: 913,333 d. Revise up
	II.	a: 500,000 b: 580,000 c: Revise down
	III.	a: 425,000 b: 479,286 c: Revise up
	IV.	a: 425,000 b: 479,286 c: Revise down

23. Learn and Earn Company is financed entirely by common stock. The stock price is $60 and the company wishes to repurchase 50% of the stock and substitutes an equal value of debt yielding 8%. Suppose that before refinancing, an investor owns 100 shares of the firm?s common stock. What should he do if he wishes to ensure the identical return on his investment? Ignore taxes and costs of financial distress.

	a.	Borrow $3,000 and buy 50 more shares
	b.	Continue to hold 100 shares
	c.	Sell 50 shares and purchase $3,000 of 8% yielding bonds
	d.	Sell 8% of his stock and invest in bonds

24. Amalgamated Inc. is 100% equity financed with a stock price of $100 per share. Suppose an investor wishes to invest in the stock of the equivalent firm but with a 20% debt capital structure. Suppose that the investor has $100,000 to invest. Further, suppose that the investor can borrow at 5%, the same rate of interest the firm would pay on par debt if the firm were 20% levered. How could the investor create an investment with risk and expected return equal to that of Amalgamated if it were levered? There are no taxes and no financial distress costs.

	a.	Borrow $25,000 at 5% and buy 1,250 shares
	b.	Buy 1,000 shares
	c.	Purchase $25,000 worth of 5% yielding bonds and 750 shares
	d.	Sell 200 shares and buy $120,000 of 5% yielding bonds

25. NuTronics Inc. is currently unlevered with a value of $1,000,000 and a marginal corporate tax rate of 40%. There are no personal taxes. The firm estimates the PV of its financial distress costs as 0.125 x Debt. What is the firm's levered value if it issues $500,000 of perpetual debt and repurchases shares with the funds?

	a.	$1,000,000
	b.	$1,137,500
	c.	$1,020,000
	d.	$1,262,500