Two firms, No Leverage Inc. and High Leverage Inc. have equal levels of operating risk and differ only in their capital structure. No Leverage is unlevered and High Leverage has $400,000 of perpetual debt in its capital structure. Assume that the perpetual annual income of both firms available for stockholders is paid out as dividends. Hence, the growth rate for both firms is zero. The income tax rate for both firms is 40 percent. Assume that there are no financial distress costs or agency costs. You are given the following data: No Leverage, Inc. High Leverage, Inc. Equity in capital structure $ 1,000,000 $ 600,000 Cost of equity, ke 10 % 14 % Debt in capital structure - $ 400,000 Pretax cost of debt, kd - 4 % Net operating income (EBIT) $ 100,000 $ 100,000 Determine the Market value of No Leverage, Inc. Round your answer to the nearest dollar. $ Market value of High Leverage, Inc. Round your answer to the nearest dollar. $ Present value of the tax shield to High Leverage, Inc. Round your answer to the nearest dollar.
Two firms, No Leverage Inc. and High Leverage Inc. have equal levels of operating risk and differ only in their capital structure. No Leverage is unlevered and High Leverage has $400,000 of perpetual debt in its capital structure. Assume that the perpetual annual income of both firms available for stockholders is paid out as dividends. Hence, the growth rate for both firms is zero. The income tax rate for both firms is 40 percent. Assume that there are no financial distress costs or agency costs. You are given the following data: No Leverage, Inc. High Leverage, Inc. Equity in capital structure $ 1,000,000 $ 600,000 Cost of equity, ke 10 % 14 % Debt in capital structure - $ 400,000 Pretax cost of debt, kd - 4 % Net operating income (EBIT) $ 100,000 $ 100,000 Determine the Market value of No Leverage, Inc. Round your answer to the nearest dollar. $ Market value of High Leverage, Inc. Round your answer to the nearest dollar. $ Present value of the tax shield to High Leverage, Inc. Round your answer to the nearest dollar.
Chapter13: Capital Structure Concepts
Section: Chapter Questions
Problem 3P
Related questions
Question
100%
Two firms, No Leverage Inc. and High Leverage Inc. have equal levels of operating risk and differ only in their capital structure. No Leverage is unlevered and High Leverage has $400,000 of perpetual debt in its capital structure. Assume that the perpetual annual income of both firms available for stockholders is paid out as dividends. Hence, the growth rate for both firms is zero. The income tax rate for both firms is 40 percent. Assume that there are no financial distress costs or agency costs. You are given the following data:
| No Leverage, Inc. | High Leverage, Inc. | |||||||
| Equity in capital structure | $ | 1,000,000 | $ | 600,000 | ||||
| 10 | % | 14 | % | |||||
| Debt in capital structure | - | $ | 400,000 | |||||
| Pretax cost of debt, kd | - | 4 | % | |||||
| Net operating income (EBIT) | $ | 100,000 | $ | 100,000 |
Determine the
- Market value of No Leverage, Inc. Round your answer to the nearest dollar.
$
- Market value of High Leverage, Inc. Round your answer to the nearest dollar.
$
- Present value of the tax shield to High Leverage, Inc. Round your answer to the nearest dollar.
$
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 2 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:
9781337514835
Author:
MOYER
Publisher:
CENGAGE LEARNING - CONSIGNMENT
Intermediate Financial Management (MindTap Course…
Finance
ISBN:
9781337395083
Author:
Eugene F. Brigham, Phillip R. Daves
Publisher:
Cengage Learning