Questions:

What is the market value of Comparable Inc? Use WACC for your calculations.

What is the market value of LBO Inc. before announcing its restructuring plan? Hint: Use APV for years 1 to 3. For years 4 and beyond, use WACC to compute the sale price of LBO (terminal value) at the end of year 3 before appropriately discounting this value back to time 0.

Comparable Inc. generates a random earnings stream (before interest and taxes) that starts next year (year 1) at $500 million and is expected to grow each year at 5% for the indefinite future. The firm has a target 20% debt-to-value ratio and an equity beta of 1.5. The riskfree interest rate is 12%, the expected return on the market portfolio is 18%, and the corporate tax rate is 40%. .LBO Inc. has the same business risk (in the same industry) and the same EBIT stream as comparable. Currently, LBO has no debt. But LBO will call a press conference this afternoon to announce a major restructuring plan to borrow 90% of the value of the existing unlevered firm at the prevailing interest rate. . Assume that this debt is riskfree. Under the restructuring plan, the firm will make interest payments for three years (in years 1, 2 and 3) but not pay back any principal. At the end of year 3, the firm will be sold to a buyer with the same capital structure policy as Comparable. Note that, because all debt is riskfree in this problem, it is correct to use a debt beta of zero when levering/unlevering. Also, assume that all debt is permanent (i.e., not rebalanced) when levering/unlevering. Comparable Inc. generates a random earnings stream (before interest and taxes) that starts next year (year 1) at $500 million and is expected to grow each year at 5% for the indefinite future. The firm has a target 20% debt-to-value ratio and an equity beta of 1.5. The riskfree interest rate is 12%, the expected return on the market portfolio is 18%, and the corporate tax rate is 40%. .LBO Inc. has the same business risk (in the same industry) and the same EBIT stream as comparable. Currently, LBO has no debt. But LBO will call a press conference this afternoon to announce a major restructuring plan to borrow 90% of the value of the existing unlevered firm at the prevailing interest rate. . Assume that this debt is riskfree. Under the restructuring plan, the firm will make interest payments for three years (in years 1, 2 and 3) but not pay back any principal. At the end of year 3, the firm will be sold to a buyer with the same capital structure policy as Comparable. Note that, because all debt is riskfree in this problem, it is correct to use a debt beta of zero when levering/unlevering. Also, assume that all debt is permanent (i.e., not rebalanced) when levering/unlevering