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This is the full question that is similar to question P14-20 in the Corporate Finance 4th Edition by Berk DeMarzo textbook. Paul Rosenzweig is founder
This is the full question that is similar to question P14-20 in the "Corporate Finance 4th Edition by Berk DeMarzo" textbook.
Paul Rosenzweig is founder and CEO of OpenStart, an innovative software company. The company is all-equity financed, with 100 million shares outstanding. The shares are trading at a price of $1. Rosenzweig currently owns 10 million shares. There are two possible states in one year. Either the new version of their software is a hit, and the company will be worth $150 million, or it will be a disappointment, in which case the value of the company will drop to $75 milion. The current risk free rate is 22%, Rosenzweig is considering taking the company private by repurchasing the rest of the outstanding equity by issuing debt due in one year. Assume the debt is zero-coupon and will pay its face value in one year. a. What is the market value of the new debt that must be issued? b. Suppose OpenStart had risk-free debt with a face value of $75 million. What would be the value of its debt and levered equity today? c. What fraction of the levered equity in (b) would you need to combine with the risk-free debt in (b) to raise the amount in (a)? d. What are the payoffs of the portfolio in (c)? What face value of risky debt would have the same payoffs? e. What is the yield on the new debt that will be required to take the company private? f. If the two outcomes are equally likely, what is OpenStart's current WACC (before the transaction)? g. What is OpenStart's debt and equity cost of capital after the transaction? Show that the WACC is unchanged by the new leverageStep by Step Solution
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