Question
Question 4 B&B is a firm in the furniture industry. Its revenues will be $10m, its costs (not including depreciation) will be $2m, depreciation will
Question 4 B&B is a firm in the furniture industry. Its revenues will be $10m, its costs (not including depreciation) will be $2m, depreciation will be $2m, and capital expenditures will be $2m. All of these figures (including Capex) accrue at the end of this year. Moreover, these figures are expected to remain constant each year for the foreseeable future. The firm has a 20% debt-to-value ratio and pays 8% on its debt. B&B plans to maintain this ratio of debt-to-value forever. The firm has 1m shares outstanding. You have no further information about B&B. However, you have the following information about ABC, a firm that is also in the furniture industry:
Number of shares outstanding = 6m Share price = $25 Beta of equity = 1.5
Market value of debt = $200 million ABC plans to maintain its debt-to-value ratio forever.
Beta of debt = 0 Assume that the risk free risk is 8% and the market risk premium is 8%. The corporate tax rate is 50%.
a) What is the return on assets for B&B?
b) What is share price for B&B?
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