Question
We are given the following information about a Company X - Debt-Value Ratio - 15% Revenue - $90,000 Cost - $50,0000 Cost of Debt -
We are given the following information about a Company X -
Debt-Value Ratio - 15%
Revenue - $90,000
Cost - $50,0000
Cost of Debt - 5%
Cost of Equity - 25%
Shares Outstanding - 5,000
Corporate Tax - 30%
(a) What is the firms value?
(b) What is its stock price?
(c) Company Y is a leveraged buyout firm. It believes that Company X's leverage is too low. It thinks that Company X's firm value can increase with higher debt-to-value ratio and believes Company X's optimal debt-to-value ratio is 15%. Company X's cost of debt at this 15% debt-to-value ratio is 9%. Company Y is considering buying all of Company X's shares and increase Company X's leverage to the optimal 15% level. Proceeds from debt issuance will be given out to equityholderes as special dividend. What is the maximum premium Company Y is willing to pay for Company X's shares?
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