Paul Rosenzweig is founder and CEO of OpenStart, an innovative software company. The company is all-equity financed, with 100 million shares outstanding. The shares are trading at a price of $ 1. Rosenzweig currently owns 10 million shares. There are two possible states in one year. Either the new version of their software is a hit, and the company will be worth $ 160 million, or it will be a disappointment, in which case the value of the company will drop to $ 75 million. The current risk free rate is 3.7 %. Rosenzweig is considering taking the company private by repurchasing the rest of the outstanding equity by issuing debt due in one year. Assume the debt is zero-coupon and will pay its face value in one year.

a. What is the market value of the new debt that must be issued?

a. the market value of the 90 million shares is 90 million.

b. the market value of the 90 million shares is 100 million

c. the market value of the 90 million shares is 160 million.

d. the market value of the 90 million shares is 75 million.

$ 75

b.. Suppose OpenStart had risk-free debt with a face value of $ 75 million. What would be the value of its debt and levered equity today? (select all that apply)

a. value of the debt is 27.68 million

b. value of the debt is 72.32 million

c. because the unlevered value of equity is $100 million, by Modigiliani-Miller, the value of the levered equity would be 27.68 million

d. because the unlevered value of equity is $100 million, by Modigiliani-Miller, the value of the levered equity would be 72.32 million

c. what fraction of the levered equity in (b) would you need to combine with the risk-free debt in (b) to raise the amount in left parenthesis Bold a right parenthesis? (select the best choice below)

a. to raise a total of 100 million, after raising 72.32 million in risk free debt you would need to raise an additional 17.68 million, which equivalent to 43.66% of the levered equity.

b. to raise a total of 90 million, after raising 72.32 million in risk free debt you would need to raise an additional 17.68 million, which equivalent to 63.87% of the levered equity.

c. to raise a total of 90 million, after raising 72.32 million in risk free debt you would need to raise an additional 17.68 million, which equivalent to 43.66% of the levered equity.

d. to raise a total of 100 million, after raising 72.32 million in risk free debt you would need to raise an additional 17.68 million, which equivalent to 63.87% of the levered equity.

d. What are the payoffs of the portfolio in (c)? What face value of risky debt would have the same payoffs? (select all that apply)

a. the payoff is 75 million if the software is not a hit, and if it is a hit the payoff is 129.29 million.

b. the payoff is 75 million if the software is not a hit, and if it is a hit the payoff is 90 million.

c. these payoffs are the same as if OpenStart issued a face value of 90 million in risky debt.

d. these payoffs are the same as if openstart issued a face value of 129.29 million in risky debt,

e. What is the yield on the new debt that will be required to take the company private?

With the face value of a. 90/ b. 129.29 million and a market value of a. 129.29 / b. 90 million the yield is a. 63.87/ b. 43.66

f. If the two outcomes are equally likely, what is OpenStart's current WACC (before the transaction)?

Without leverage the return on equity is a. 60%/ b. 17.5%/ c. -25% when high or a. 60%/ b. 17.5%/ c.-25% when low, for an expected return of a. 60%/ b. 17.5%/ c. -25%. as the company is currently all equity. This is its initial WACC.

g. what is OpenStarts debt and equity cost of capital after the transaction? Show that the WACC is unchanged by the new leverage.

OpenStart's debt return is a. 43.66% b. -16.67 c. 17.51% d. 53.60% e. 13.5% in the good state, and a. 43.66% b. -16.67 c. 17.51% d. 53.60% e. 13.5% in the bad state, for an expected return of a. 43.66% b.-16.67 c. 17.51% d. 53.60% e. 13.5%. OpenStart's remaining equity is worth a. 30.71 b. 10.00 c. 15.36 million and has a payoff of a. 30.71 b. 10.00 c. 15.36 million or zero, or an expected payoff of a. 30.71 b. 10.00 c.15.36 million. This corresponds to an expected return of a. 43.66% b. -16.67 c. 17.51% d. 53.60% e. 13.5%. The WACC is therefore a. 43.66% b. -16.67 c. 17.51% d. 53.60% e. 13.5% just as in (f).