Question

Jack Ltd. is a manufacturer of scooter and expects to generate $165,000 of earnings before interest and taxes in perpetuity. The company distributes all its earnings as dividends at the end of each year. Jack Ltd. has an unlevered cost of capital of 10.5 percent and its marginal tax rate is 30 percent. Jack Ltd. just issued $300,000 of perpetual 6 percent debt and used the proceeds to repurchase stock. This debt issuance would not change the company's risk. The company's debt is selling at par.

Required:

(a) What is the value of Jack Ltd. as an unlevered company? (2 marks)

(b) What is the value of the company with leverage? (1 mark)

(c) What is the required return on the company's levered equity? (3 marks)

(d) Suppose the scooter manufacturing industry has an average unlevered beta of 1.20. What is Jack Ltd.'s levered equity beta? (4 marks)

(e) What is the implied debt beta for the company? (4 marks)