Please include calculations.XYZ company has the following expected cash flows for three scenarios that could occur:                         Recession        Expected         Expansion                        (prob. = .2)      (prob. = .5)      (prob. =.3)EBIT               $10,000           $20,000          $30,000MV Assets                                ______  (a) Complete the table above if the company is 100% equity financed, it pays taxes at 30%, the non-levered return on equity is expected to be 12%, the constant growth rate (g) is 5%, and overall firm value is calculated based on the expected after-tax cash flows (b) If the company wants to recapitalize (debt for equity swap) to save on taxes, what is the most debt the company can add (at a 6% rate) so that it will never go bankrupt under the above scenarios? (Assume the company goes bankrupt if EBIT < Interest owed) (c) Calculate the WACC for the unlevered case and for the result in part (b). (d) What is the market value of the assets if the firm chooses the debt level in part (b)? [Note: calculate this using MM Prop I (with taxes)] (e) If $200,000 in bonds are issued, what is the probability of bankruptcy over a three year period? (Note: you can assume each year is an independent draw from the above distribution)

Question
Asked Nov 8, 2019
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Please include calculations.

XYZ company has the following expected cash flows for three scenarios that could occur:

 

                        Recession        Expected         Expansion

                        (prob. = .2)      (prob. = .5)      (prob. =.3)

EBIT               $10,000           $20,000          $30,000

MV Assets                                ______

 

 

(a) Complete the table above if the company is 100% equity financed, it pays taxes at 30%, the non-levered return on equity is expected to be 12%, the constant growth rate (g) is 5%, and overall firm value is calculated based on the expected after-tax cash flows

 

(b) If the company wants to recapitalize (debt for equity swap) to save on taxes, what is the most debt the company can add (at a 6% rate) so that it will never go bankrupt under the above scenarios? (Assume the company goes bankrupt if EBIT < Interest owed)

 

(c) Calculate the WACC for the unlevered case and for the result in part (b).

 

(d) What is the market value of the assets if the firm chooses the debt level in part (b)? [Note: calculate this using MM Prop I (with taxes)]

 

(e) If $200,000 in bonds are issued, what is the probability of bankruptcy over a three year period? (Note: you can assume each year is an independent draw from the above distribution)

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Expert Answer

Step 1

Hey, since there are multiple questions posted, we will answer first three question. If you want any specific question to be answered then please submit that question only or specify the question number in your message.

Step 2

(a)

 The non-levered return on equity (ROE) is expected to be 12%.

Therefore, the market value of the asset in case of expected EBIT will be the same as the book value of assets because the expected ROE is 12%.

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EBIT(1-tax rate) ROE Assets 20,000 (1-0.30) Total assets (Book value) 0.12 $116,666.67

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Step 3

In case off recession:...

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$10,000 x (1-0.30) ROE $116, 666.67 =0.06 or 6%

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