According t traditional approach, compute the market value of the firm, valueof shares and the average cost of capital from the following information:Net Operating Income $ 100,000Total Investment $ 700,000Equity capitalization Rate:(a) If the firm uses no debt 7%.(b) If the firm uses $200,000 debentures 8%(c) If the firm uses $400,000 debentures 9%Assume that $200,000 debentures at 6% rate of interest whereas $400,000debentures at 6% rate of interest whereas $400,000 debentures at 7% rate ofinterest.

Here is how you can compute the market value of the firm, value of shares, and the average cost of…

Answered: According t traditional approach,…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter13: Capital Structure Concepts

Section: Chapter Questions

Problem 2P

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Suppose IWT has decided to distribute $50 million, which it presently is holding in liquid short-term investments. IWT’s value of operations is estimated to be about $1,937.5 million; it has $387.5 million in debt and zero preferred stock. As mentioned previously, IWT has 100 million shares of stock outstanding. Assume that IWT has not yet made the distribution. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Now suppose that IWT has just made the $50 million distribution in the form of dividends. What is IWT’s intrinsic value of equity? What is its intrinsic stock price per share? Suppose instead that IWT has just made the $50 million distribution in the form of a stock repurchase. Now what is IWT’s intrinsic value of equity? How many shares did IWT repurchase? How many shares remained outstanding after the repurchase? What is its intrinsic stock price per share after the repurchase?
Assume Plainfield Manufacturing has debt of $6,500,000 with a cost of capital of 9.5% and equity of $4,500,000 with a cost of capital of 11.5%. What is Tylers weighted average cost of capital?
The Rivoli Company has no debt outstanding, and its financial position is given by the following data: What is Rivoli’s intrinsic value of operations (i.e., its unlevered value)? What is its intrinsic stock price? Its earnings per share? Rivoli is considering selling bonds and simultaneously repurchasing some of its stock. If it moves to a capital structure with 30% debt based on market values, its cost of equity, rs, will increase to 12% to reflect the increased risk. Bonds can be sold at a cost, rd, of 7%. Based on the new capital structure, what is the new weighted average cost of capital? What is the levered value of the firm? What is the amount of debt? Based on the new capital structure, what is the new stock price? What is the remaining number of shares? What is the new earnings per share?
Bayani Bakerys most recent FCF was 48 million; the FCF is expected to grow at a constant rate of 6%. The firms WACC is 12%, and it has 15 million shares of common stock outstanding. The firm has 30 million in short-term investments, which it plans to liquidate and distribute to common shareholders via a stock repurchase; the firm has no other nonoperating assets. It has 368 million in debt and 60 million in preferred stock. a. What is the value of operations? b. Immediately prior to the repurchase, what is the intrinsic value of equity? c. Immediately prior to the repurchase, what is the intrinsic stock price? d. How many shares will be repurchased? How many shares will remain after the repurchase? e. Immediately after the repurchase, what is the intrinsic value of equity? The intrinsic stock price?
Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.82 million in debt that trades at par and pays an 8% interest rate. Vandell’s free cash flow (FCFJ is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 40% combined federal and state tax rate. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s First step is to estimate the current intrinsic value of Vandell. What are Vandell’s cost of equity and weighted average cost of capital? What is Vandell’s intrinsic value of operations? [Hint: Use the free cash flow corporate valuation model from Chapter 8.) What is the current intrinsic value of Vandell’s stock?
Delta Corporation has the following capital structure: Cost (aftertax)WeightsWeighted CostDebt (Kd)5.5%25%1.38%Preferred stock (Kp)10.5252.63Common equity (Ke) (retained earnings)10.5505.25Weighted average cost of capital (Ka) 9.25% If the firm has $26 million in retained earnings, at what size capital structure will the firm run out of retained earnings? Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10". Note: Enter your answer in millions of dollars (e.g., $10 million should be entered as "10".The 5.5 percent cost of debt referred to earlier applies only to the first $18 million of debt. After that the cost of debt will go up. At what size capital structure will there be a change in the cost of debt?
Byrd Corporation is comparing two different capital structures, an all-equity plan (Plan I) anda levered plan (Plan II). Under Plan I, the company would have 365,000 shares of stockoutstanding. Under Plan II, there would be 245,000 shares of stock outstanding and RM4.56million in debt outstanding. The interest rate on the debt is 10 percent and there are no taxes.(i) Use MM Proposition I to find the price per share. (ii) What is the value of the firm under each of the two proposed plans?
A company has determined that its optimal; capital structure consists of 40%debt and 60% equity. Assume the firm will not have enough retained earnings to fund the equity portion of its capital budget. Also assume the firm accounts for flotation cost by adding the cost of capital. Given the following information, calculate the firm's WACC. Net Income - P40,000; Pay out ratio 60% Estimated bond yield - 8%; Shares outstanding - 10,000 shares Market Price = P25.00 ; Growth = 5% Flotation cost - 12% ; Tax rate - 40% show solution
Referring to table below, calculate the market value of firm L (without a corporate income tax) if the equity amount in its capital structure decreases to $5,000 and the debt amount increases to $5,000. At this capital structure, the cost of equity is 15 percent. Round your answer to the nearest dollar. Firm U Firm L Net operating income (EBIT) $ 1,000 $ 1,000 Less: Interest payments to debt holders, I - 100 Income available to stockholders (dividends), D $ 1,000 $ 900 Total income available to security holders, I + D $ 1,000 $ 1,000 Required rate of return on debt, kd - 5 % Market value of debt, B = I/kd - $ 2,000 Required rate of return on equity,ke 10 % 11.25 % Market value of equity, E = D/ke $ 10,000 $ 8,000 Market value of firm, E + B $ 10,000 $ 10,000 $

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