ROSE has no debt, its shareholders require a return of 10%, and EBIT of $25,000 which is paid annually in perpetuity starting in one year. JISOO is identical except it is partially financed by $40,000 of perpetual bonds with an annual coupon of 7%. The tax rate is zero. What is the cost of equity for JISOO?
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ROSE has no debt, its shareholders require a return of 10%, and EBIT of $25,000 which is paid annually in perpetuity starting in one year. JISOO is identical except it is partially financed by $40,000 of perpetual bonds with an annual coupon of 7%. The tax rate is zero. What is the
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- The Morrit Corporation has $600,000 of debt outstanding, and it pays an interest rate of 8% annually. Morrit’s annual sales are $3 million, its average tax rate is 40%, and its net profit margin on sales is 3%. If the company does not maintain a TIE ratio of at least 5 to 1, then its bank will refuse to renew the loan, and bankruptcy will result. What is Morrit’s TIE ratio?Connor Corp. has an EBIT of $970,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 12 percent, and the corporate tax rate is 21 percent. The company also has a perpetual bond issue outstanding with a market value of $1.91 million. What is the value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to the nearest whole dollar, e.g., 1,234,567.)Maddux Corporation has EBIT of $725,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 11 percent and the corporate tax rate is 24 percent. The company also has a perpetual bond issue outstanding with a market value of $1.6 million. What is the value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89) The CFO of the company informs the company president that the value of the company is $4.9 million. Is the CFO correct?
- Morrow Corp. has an EBIT of $875,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 14 percent and the corporate tax rate is 25 percent. The company also has a perpetual bond issue outstanding with a market value of $2.3 million. What is the value of the company? (Do not round intermediate calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)your company has taken a loan for $2,000,000 at 5% annual interest. your company has also issuwd 15 bonds at a face value of $40,000 each which pay 2% annual interest. Also the company has sold 3,000 shares of stock for $400 per share. The company knows shareholder are expecting a return of 15% per year? Assuming you company uses the weighted average cost of capital approach and only pays federal taxes, what is the after tax MARR?LALAMOVE Trucking Inc. is expected to generate EBIT of $5 million annually in perpetuity (starting in one year). LALAMOVE is all equity financed and shareholders require a return of 11%. The corporate tax rate is 35%. LALAMOVE is proposing to issue $5 million of perpetual bonds with an annual coupon of 6%. The company uses the $5M of debt to repurchase stock at $15.65 per share. Assume that, after borrowing the $5M, LALAMOVE never increases or decreases its debts. What is the share price after the new debt issue?
- Shadow, Inc., is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4.5 million worth of debt outstanding. The cost of this debt is 8 percent per year. Shadow expects to have an EBIT of $1.8 million per year in perpetuity. Shadow pays no taxes. (1) What is the expected return on the equity of an otherwise identical all-equity firm? (2) What is the expected return on the firm’s equity after the announcement of the stock repurchase plan?Maddux Corporation has EBIT of $725,000 per year that is expected to continue in perpetuity. The unlevered cost of equity for the company is 11 percent and the corporate tax rate is 24 percent. The company also has a perpetual bond issue outstanding with a market value of $1.6 million. What is the value of the company?Nobleford Inc. is trying to determine its cost of debt. The firm has a debt issue outstanding with 23 years to maturity that is quoted at 97% of face value. The issue makes semiannual payments and has an embedded cost of 5% annually. Assume the par value of the bond is $1,000. What is the company’s pre-tax cost of debt? If the tax rate is 35%, what is the after-tax cost of debt?
- A company expects EBIT of 200000 every year into perpetuity. The firm currently has no debt, but it can borrow at 10% per annum. The company's cost of equity is 25% and the company is subject to a corporate tax rat of 35%. If the company borrows 200,000 and uses the proceeds to repurchase equity, the value of the company would be:Shadow, Inc., is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4.5 million worth of debt outstanding. The cost of this debt is 8 percent per year. Shadow expects to have an EBIT of $1.8 million per year in perpetuity. Shadow pays no taxes. (1) What is the market value of Shadow, Inc. before and after the repurchase announcement? (2) What is the expected return on the firm’s equity before the announcement of the stock repurchase plan?Moss Inc. is considering issuing $1,000,000 worth of perpetual bonds yielding $60,000 interest per year. Moss Inc. currently has no debt outstanding and will use the bond proceeds to repurchase equity. Moss Inc. has 100% dividend payout ratio and EBIT is $2,000,00 per year forever. Corporate tax rate is 60%. a. If the personal tax rate is 30%, which plan (all equity or debt + equity) offers the investors the highest cash flows? Why? b. If the shareholders require a 15% return before personal taxes, what is the value of the firm under each plan? (Do not ignore personal taxes). c. Suppose Ts=25% and Tb=35%. What are the investors' cash flows under each plan? Repeat part (b).
