26) Can i please get help with this practice question. Company U and company L are identical in every respect except company U is unlevered and company L has$8,000,000 perpetual debt with an interest rate of 4%. Both companies are expecting to have an EBIT of $1,200,000 inperpetuity and all earnings will be immediately distributed to common shareholders. Company U has a cost of equity of6%. Assume that all Modigliani and Miller assumptions are satisfied. Calculate the cost of equity for the levered firmaccording to MM proposition Il without taxes.(Do not round intermediate calculations. Round the final answer to 2decimal places. Omit the % sign in your response. For example, an answer of 15.39% should be entered as 15.39.)Numeric Response

According to the MM proposition if the all the other parameters are same then the value of the…

Answered: Company U and company L are identical…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter17: Dynamic Capital Structures And Corporate Valuation

Section: Chapter Questions

Problem 7P

See similar textbooks

Similar questions

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?
Southwestern Wear Inc. has the following balance sheet: The trustees costs total 281,250, and the firm has no accrued taxes or wages. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of 2.5 million is received from sale of the assets?
Usk Plc and Gant Plc are both public companies, whose shares are quoted on the Stock Exchange. Both earn an annual net operating income, before charging debenture interest, of £4 million, and it is generally expected that they will continue to do so indefinitely. The net operating income of both companies, before charging debenture interest, is subject to an identical degree of business risk. Usk is financed with 100% equity. Gant is financed with 50% debt and 50% equity. Assume both Usk and Gant operate in Modigliani and Miller’s(M&M) world. Required: (a)What are your expectations for the total market value of the two companies and for their weighted average cost of capital? Hint: Do not forget that they operate in M&M world (b) Briefly discuss how the imposition of tax and bankruptcy costs affects M&M theory of capital structure.
Firm AB and Firm YZ are identical except for their debt-to-total-assets ratios (D/Tas) and interest rates on debt. Each has $200,000 in assets, $40,000 EBIT, and a 40% marginal tax rate. Firm AB has a D/TA ratio of 40% and pays 7.5% interest on its debt, whereas YZ has a 60% D/TA ratio and pays 10% interest on debt. Each firm has 5,000 shares of common stock outstanding. Calculate each firm's EPS and Return on Equity.
ABC Company and XYZ Company are identical firms in all respects except for their capital structure. ABC is all-equity financed with $725,000 in stock. XYZ uses both stock and perpetual debt; its stock is worth $362,500 and the interest rate on its debt is 8.2 percent. Both firms expect EBIT to be $74,000. Ignore taxes. a. Rico owns $54,375 worth of XYZ’s stock. What rate of return is he expecting? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. Suppose Rico invests in ABC Company and uses homemade leverage to match his cash flow in part (a). Calculate his total cash flow and rate of return. (Do not round intermediate calculations and enter your return answer as a percent rounded to 2 decimal places, e.g., 32.16.)
Epiphany is an all-equity firm with an estimated market value of $400,000. The firm sells $225,000 of debt and uses the proceeds to purchase outstanding equity. Compute the weight in equity and the weight in debt after the proposed financing and repurchase of equity.
ABC and XYZ are identical firms in all respects except for their capital structures. ABC is all-equity financed with $530,000 in stock. XYZ has the same total value but uses both stock and perpetual debt; its stock is worth $310,000 and the interest rate on its debt is 7.9 percent. Both firms expect EBIT to be $62,222. Ignore taxes. Compute the costs of equity for both ABC and XYZ.
MV Corporation has debt with market value of $95 million, common equity with a book value of $101 million, and preferred stock worth $22 million outstanding. Its common equity trades at $45 per share, and the firm has 5.6 million shares outstanding. What weights should MV Corporation use in its WACC? The debt weight for the WACC calculation is __ % ? (Round to two decimal places.)
Companies U and L are identical in every respect except that U is unlevered while L has $20 million of 8% bonds outstanding. Assume: (1) All of the MM assumptions are met. (2) Both firms are subject to a 25% federal-plus-state corporate tax rate. (3) EBIT is $3 million. (4) The unlevered cost of equity is 12%. What is the WACC for Firm U? % What is the WACC for Firm L? %
Abacus Calculation Company and Zoom Calculators Inc. are identical except for capital structures. Abacus has 50% debt and 50% equity, whereas Zoom has 30% debt and 70% percent equity. The borrowings rate for both companies is 8% in a no tax world, and capital markets are assumed to be perfect. i. If you own 4 percent of the stock of Abacus, what is dollar return if the company has net operating income of $3,60000 and the overall capitalization rate of the company is 18%? ii. What is the implied required rate of return on equity? Zoom has the same net operating income as Abacus. What is the implied required equity return of Zoom? Why does it differ from that of Abacus?
Ski and Board are two identical firms of identical size operating in identical markets. Ski is unlevered with assets valued at $13000 and has 650 shares of stock outstanding Board also has $13000 in assets and has $4000 in debt financed at an interest rate of 9.00% and has 450 shares of stock outstanding Both Ski and Board pay tax at the rate of 30%.Calculate the level of EBIT that would make earnings per share the same for Ski and Board $ _______ Place your answer to the nearest dollar. If applicable, your answer should NOT include a comma.
The market value of the equity of Nina, Incorporated, is $594,000. The balance sheet shows $33,000 in cash and $204,000 in debt, while the income statement has EBIT of $105,000 and a total of $149,000 in depreciation and amortization. What is the enterprise value-EBITDA multiple for this company? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

SEE MORE QUESTIONS

Recommended textbooks for you

Intermediate Financial Management (MindTap Course…

Finance

ISBN:

9781337395083

Author:

Eugene F. Brigham, Phillip R. Daves

Publisher:

Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Financial Reporting, Financial Statement Analysis…

Finance

ISBN:

9781285190907

Author:

James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:

Cengage Learning

Intermediate Financial Management (MindTap Course…

Finance

ISBN:

9781337395083

Author:

Eugene F. Brigham, Phillip R. Daves

Publisher:

Cengage Learning

EBK CONTEMPORARY FINANCIAL MANAGEMENT

Finance

ISBN:

9781337514835

Author:

MOYER

Publisher:

CENGAGE LEARNING - CONSIGNMENT

Financial Reporting, Financial Statement Analysis…

Finance

ISBN:

9781285190907

Author:

James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:

Cengage Learning

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Corporate Fin Focused Approach

Finance

ISBN:

9781285660516

Author:

EHRHARDT

Publisher:

Cengage

Financial Accounting

Accounting

ISBN:

9781337272124

Author:

Carl Warren, James M. Reeve, Jonathan Duchac

Publisher:

Cengage Learning

SEE MORE TEXTBOOKS