V2 - A5 11-15 Please show workings with solutions - I posted this question previously but did not agree with the answers. With these questions, please take special note of tax.

Questions 11-15 relate to the same mega problem.

For purposes of the questions that follow, assume that changes in working capital are negligible and capex and depreciation are of the same magnitude and therefore cancel each other.

Q11.Talmart is an all-equity firm with an EBIT of $75,000 per year that is expected to stay the same for the foreseeable future. Your research had shown that the beta equity of Talmart was 2.00 and it had 20,000 shares outstanding. Talmart has however recently issued a bond yielding 7.50% with a market value of $250,000 and will use these funds to buy back shares (a fairly common practice). Talmart also plans to retain $250,000 of debt financing in perpetuity. Suppose the expected return on the market is 10% and the risk free rate is 5%. Assume the corporate tax rate is 35% and interest payments on debt are tax deductible.

Q11. How many shares will Talmart buy back?

( For this question, I beleive price per share is needed, which means you need to calculate value of the firm first - please do this and show all workings - I got value of the firm to be 412,500 but not sure if this is correct). Once price per share is known, I beleive you then go onto calculate how many shares Talmart will buy back...

Q12. Talmart was an all-equity firm with an EBIT of $75,000 per year that is expected to stay the same for the foreseeable future. Your research had shown that the beta equity of Talmart was 2.00 and it had 20,000 shares outstanding. Talmart has however recently issued a bond yielding 7.50% with a market value of $250,000 and will use these funds to buy back shares (a fairly common practice). Talmart also plans to retain $250,000 of debt financing in perpetuity. Suppose the expected return on the market is 10% and the risk free rate is 5%. Assume that the corporate tax rate is 35% and the interest payments on debt are tax deductible.

Q12. What will Talmarts new return on equity be?

Q13. What will Talmarts new beta of equity be?

Q14. What will Talmarts new share price be?

Q15. What will Talmarts new return on assets be?