PARTI - M&M THEORY REVIEW (13/50) Proposition 1 (No Taxes) Case Corp and Western Tech are two identical companies except for their capital structures. Neither firm pays taxes. Case Corp is unlevered and has 7,500 shares outstanding, each worth $25. Western Tech is levered and has $45,000 in debt at a cost of debt of Rd = 10%. A 1) How much are the assets of Case Corp worth? (1 pts) 2) How much are the assets of Western Tech worth? (1 pts) 3) What is Western Tech's value of equity? (1 pts)- 4) How much would it cost to buy 50% of the total equity of each company? (1 pts)- 5) Is Western Tech more risky than Case Corp? Please explain. (1 pts) Proposition II (No Taxes) Years later, Case Corp and Western Tech have expanded operations but continue to be identical except for their capital structures. Neither firm pays taxes. Now both firms have EBIT of $100,000 in perpetuity. Case Corp continues to be unlevered and has equity worth $1,000,000 in equity (the number of shares is unspecified). Western Tech has equity worth $600,000 (number of shares unspecified) and has a new cost of debt of 8%. (Note that this is a new set of facts. Do not use facts from the previous question). 6) If you own $45,000 worth of stock of Western Tech, what percentage of the company do you own and what rate of return should you, as an individual investor, expect? (2 pts) 7) What is the cost of equity for Case Corp? (1 pts) 8) What is the cost of equity for Western Tech? (1 pts) 9) What is the WACC for Case Corp? (1 pts) 10) What is WACC for Western Tech? (1 pts) Proposition I (With Taxes)- Reserve Inc. is an unlevered firm. The company is planning to borrow $2 million at an interest rate of 10%. The loan will be repaid in equal installments over the next two years. The tax rate is 25%. # 11) What is the increase in the value of the company after taking out the loan? (2 pts)- PARTI - M&M THEORY REVIEW (13/50) Proposition 1 (No Taxes) Case Corp and Western Tech are two identical companies except for their capital structures. Neither firm pays taxes. Case Corp is unlevered and has 7,500 shares outstanding, each worth $25. Western Tech is levered and has $45,000 in debt at a cost of debt of Rd = 10%. A 1) How much are the assets of Case Corp worth? (1 pts) 2) How much are the assets of Western Tech worth? (1 pts) 3) What is Western Tech's value of equity? (1 pts)- 4) How much would it cost to buy 50% of the total equity of each company? (1 pts)- 5) Is Western Tech more risky than Case Corp? Please explain. (1 pts) Proposition II (No Taxes) Years later, Case Corp and Western Tech have expanded operations but continue to be identical except for their capital structures. Neither firm pays taxes. Now both firms have EBIT of $100,000 in perpetuity. Case Corp continues to be unlevered and has equity worth $1,000,000 in equity (the number of shares is unspecified). Western Tech has equity worth $600,000 (number of shares unspecified) and has a new cost of debt of 8%. (Note that this is a new set of facts. Do not use facts from the previous question). 6) If you own $45,000 worth of stock of Western Tech, what percentage of the company do you own and what rate of return should you, as an individual investor, expect? (2 pts) 7) What is the cost of equity for Case Corp? (1 pts) 8) What is the cost of equity for Western Tech? (1 pts) 9) What is the WACC for Case Corp? (1 pts) 10) What is WACC for Western Tech? (1 pts) Proposition I (With Taxes)- Reserve Inc. is an unlevered firm. The company is planning to borrow $2 million at an interest rate of 10%. The loan will be repaid in equal installments over the next two years. The tax rate is 25%. # 11) What is the increase in the value of the company after taking out the loan? (2 pts)
