Question 1: The Goscape Corporation currently has no debt outstanding. Sunny Gevaert, the CFO, is considering restructuring the company by issuing $500,000 debt with a 6% interest rate and using the proceeds to repurchase outstanding equity. The total market value of Goscape's assets are worth $2,000,000 and there are 50,000 shares outstanding. 1.1. Ignore the corporate tax rate, calculate and fill in the values in the following table. (1.75 points) No. Capital structure Current Proposed 1 Total market value of assets $2,000,000 $2,000,000 Equity Debt $500,000 Debt-Equity Ratio 5 Share price 6 Shares outstanding 50,000 Interest rate 6% 8 EBIT at EPS = 0 EBIT at indifference point 10 EPS at indifference point 2 3 4 7 9 1.2. Use a scatter plot and draw a graph to represent the EPS EBIT indifference point between the current capital structure and the proposed one. If the Goscapes goal is to maximize its EPS, which is financing option chosen? Why? (0.75 point) 1.3. With the proposed capital structure, given corporate tax rate is 20%, WACC is 11%. What is Goscape's cost of equity? Use the M&M Proposition II with taxes, what is Goscape's unlevered cost of capital? Give your opinion about the Debt- Equity Ratio and the cost of equity if there is the higher leverage and vice versa. (1.5 points) 1.4. Calculate the expected EBIT with given values in the following table. Use the values of part (1.3) and this expected EBIT, calculate the perpetuity present value of tax shield of interest, the perpetuity present value of levered firm (1 points) Scenario Probability EBIT 1 Recession 10% $56,000 2 Normal 70% $140,000 3 Expansion 20% $182,000 No. 3 Question 1: The Goscape Corporation currently has no debt outstanding. Sunny Gevaert, the CFO, is considering restructuring the company by issuing $500,000 debt with a 6% interest rate and using the proceeds to repurchase outstanding equity. The total market value of Goscape's assets are worth $2,000,000 and there are 50,000 shares outstanding. 1.1. Ignore the corporate tax rate, calculate and fill in the values in the following table. (1.75 points) No. Capital structure Current Proposed 1 Total market value of assets $2,000,000 $2,000,000 Equity Debt $500,000 Debt-Equity Ratio 5 Share price 6 Shares outstanding 50,000 Interest rate 6% 8 EBIT at EPS = 0 EBIT at indifference point 10 EPS at indifference point 2 3 4 7 9 1.2. Use a scatter plot and draw a graph to represent the EPS EBIT indifference point between the current capital structure and the proposed one. If the Goscapes goal is to maximize its EPS, which is financing option chosen? Why? (0.75 point) 1.3. With the proposed capital structure, given corporate tax rate is 20%, WACC is 11%. What is Goscape's cost of equity? Use the M&M Proposition II with taxes, what is Goscape's unlevered cost of capital? Give your opinion about the Debt- Equity Ratio and the cost of equity if there is the higher leverage and vice versa. (1.5 points) 1.4. Calculate the expected EBIT with given values in the following table. Use the values of part (1.3) and this expected EBIT, calculate the perpetuity present value of tax shield of interest, the perpetuity present value of levered firm (1 points) Scenario Probability EBIT 1 Recession 10% $56,000 2 Normal 70% $140,000 3 Expansion 20% $182,000 No. 3
