24) Can i please get help with this practice question. U and L are two firms with the same EBIT of $100,000. They are identical in every respect except firm L has a debt of$750,000 at 6% rate of interest. The cost of equity of firm U is 8% and that of firm L is 10%. Assume that arbitrageprinciple will be applied in this setting and it is possible to make an arbitrage profit (surplus). Also, all earnings streamsare perpetuities, taxes are ignored and both firms distribute all earnings available to common stockholders.Assume that an investor has 20% of shares (equity) of the firm L and MM assumptions hold. That is, you will be able toborrow or lend at the same rate as the firms can (6%). How much would the arbitrage profit (surplus) be for that investorwho owns 20% of equity of the firm L and plans to create that arbitrage by switching to firm U? (Do not use the $ sign inyour answer. If your answer is $12,345.67, then enter 12345.67)Numeric Response

Arbitrage is the profit made by purchasing and selling the same securities or portfolio at various…

Answered: U and L are two firms with the same…

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

Macon Mills is a division of Bolin Products. Inc. During the most recent year, Macon had a net income of $40 million. Included in the income was interest expense of $2,800,000. The companys tax rate was 40%. Total assets were $470 million, current liabilities were $104,000,000, and $72,000,000 of the current liabilities are noninterest bearing. What are the invested capital and ROI for Macon?
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?
Give only typing answer with explanation and conclusion U and L are two firms with the same EBIT of $115,000. They are identical in every respect except firm L has a debt of $900,000 at 6% rate of interest. The cost of equity of firm U is 8% and that of firm L is 10%. Assume that arbitrage principle will be applied in this setting and it is possible to make an arbitrage profit (surplus). Also, all earnings streams are perpetuities, taxes are ignored and both firms distribute?
Consider two firms that are identical in every respect EXCEPT for their capital structures. The unlevered firm is financed entirely by equity whereas the capital structure of the levered firm includes $30,000 of debt at 12%.The annual earnings of both companies before interest are the same, $10,000. The cost of equity in the unlevered firm is 15% and in the levered company at 16%. A) Determine the market values of the two companies. B) Suppose an investor owns 1% of the equity in the levered firm, describe the arbitrage process.
Given: Firm A is all-equity financed and has total assets of $200 million. Firm B is an identical firm to Firm A, but 70% of its $200 million of total assets are financed with debt bearing an interest rate of 5%. Assume firms pay corporate taxes at the rate of 20% of taxable earnings. Both firms have the same EBIT, $15 million. Compute Firm B's interest deduction. Firm B’s interest deduction is $ ______ million. Keep the result with one decimal.
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 $ 800,000 $ 400,000 Cost of equity, ke 12.5 % 20 % Debt in capital structure - $ 400,000 Pretax cost of debt, kd - 5 % 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…

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

Principles of Accounting Volume 2

Accounting

ISBN:

9781947172609

Author:

OpenStax

Publisher:

OpenStax College

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Corporate Fin Focused Approach

Finance

ISBN:

9781285660516

Author:

EHRHARDT

Publisher:

Cengage

SEE MORE TEXTBOOKS