please help with #s 5,6, & 7. please use Excel and show calculations. thank you!
Assume you have just been hired as a business manager of Gary's Guacamole a regional health food restaurant chain. The company's EBIT was $100 million last year and is not expected to grow. The firm is currently financed with all equity and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firm's owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures: If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. Gary's Guacamole is in the 25 percent state-plus-federal corporate tax bracket, its beta is 95 the risk-free rate is 5 percent, and the market risk premium is 7.5 percent. Now, to develop an example which can be presented to Gary's Guacamole management to illustrate the effects of financial leverage, consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses $35,000 of 8 percent debt. Both firms have $80,000 in assets, a 25 percent tax rate, 5. What happens to ROE for Firm U and Firm L if EBIT falls to $4,000 ? What does this imply about the impact of leverage on risk and return? 6. For each capital structure under consideration, calculate the levered beta, the cost of equity, and the WACC. 7. Now calculate the corporate value. Assume you have just been hired as a business manager of Gary's Guacamole a regional health food restaurant chain. The company's EBIT was $100 million last year and is not expected to grow. The firm is currently financed with all equity and it has 10 million shares outstanding. When you took your corporate finance course, your instructor stated that most firm's owners would be financially better off if the firms used some debt. When you suggested this to your new boss, he encouraged you to pursue the idea. As a first step, assume that you obtained from the firm's investment banker the following estimated costs of debt for the firm at different capital structures: If the company were to recapitalize, debt would be issued, and the funds received would be used to repurchase stock. Gary's Guacamole is in the 25 percent state-plus-federal corporate tax bracket, its beta is 95 the risk-free rate is 5 percent, and the market risk premium is 7.5 percent. Now, to develop an example which can be presented to Gary's Guacamole management to illustrate the effects of financial leverage, consider two hypothetical firms: Firm U, which uses no debt financing, and Firm L, which uses $35,000 of 8 percent debt. Both firms have $80,000 in assets, a 25 percent tax rate, 5. What happens to ROE for Firm U and Firm L if EBIT falls to $4,000 ? What does this imply about the impact of leverage on risk and return? 6. For each capital structure under consideration, calculate the levered beta, the cost of equity, and the WACC. 7. Now calculate the corporate value
