Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Please answer last 4 parts that is e, f, g, h. Problem #1 (14 marks) Morrison Medical Inc., an all-equity firm, has earnings before interest
Please answer last 4 parts that is e, f, g, h.
Problem #1 (14 marks) Morrison Medical Inc., an all-equity firm, has earnings before interest and taxes of $950,000 and an un-levered beta of.80. The firm has 200,000 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume a world with no taxes and no cost for the risk of default. All general M&M assumptions apply. a) What is the market value of the firm? (2 marks) b) What is the WACC for the firm. (1 mark) c) What is the market value of a share in the company and what is the EPS? (2 marks) d) What is the market value of the firm and the market value of the equity if they issue $5,000,000 in debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? (2 marks) e) What is the new cost of equity? (2 marks) f) According to CAPM, what is the new beta? (2 marks) g) What is the WACC? (2 marks) h) Explain what happens to the market value of the firm and the WACC if the firm increases its debt-to-equity ratio. (1 mark)Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started