Financial Management: Theory & Practice (MindTap Course List)
15th Edition
ISBN: 9781305632295
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 15, Problem 9P
Summary Introduction
To determine: Firm’s weighted average cost of capital (WACC) and total corporate value under each capital structure.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
Pettit Printing Company (PPC) has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company's EBIT is $12.68 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 65% (based on market values) or decreasing it to 35%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 9% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change.
PPC expects no growth in its EBIT, so gL is zero. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%. What is the firm's WACC and total corporate value under each capital structure? Do not round intermediate…
Pettit Printing Company (PPC) has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company's EBIT is $10.50 million, and its tax rate is 15%. Pettit can change its capital structure by either increasing its debt to 55% (based on market values) or decreasing it to 45%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 8% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change.
PPC expects no growth in its EBIT, so gL is zero. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 16%. If it decreases leverage, rs will be 13%.
What is the firm's WACC and total corporate value under each capital structure? Do not round intermediate…
Saleem Printing Company has a total market value of $100 million, consisting of 1 million shares selling for $50 per share and $50 million of 10% perpetual bonds now selling at par. The company's EBIT is $20.24 million, and its tax rate is 15%. Saleem can change its capital structure either by increasing its debt to 55% (based on market values) or decreasing it to 25%. If it decides to increase its use of leverage, it must call its old bonds and issue new ones with a 12% coupon. If it decides to decrease its leverage, it will call its old bonds and replace them with new 8% coupon bonds. The company will sell or repurchase stock at the new equilibrium price to complete the capital structure change.
The firm pays out all earnings as dividends; hence its stock is a zero-growth stock. Its current cost of equity, rs, is 14%. If it increases leverage, rs will be 17%. If it decreases leverage, rs will be 12%. What is the firm's WACC and total corporate value under each capital structure?
Chapter 15 Solutions
Financial Management: Theory & Practice (MindTap Course List)
Ch. 15 - Prob. 1QCh. 15 - What term refers to the uncertainty inherent in...Ch. 15 - Firms with relatively high nonfinancial fixed...Ch. 15 - “One type of leverage affects both EBIT and EPS....Ch. 15 - Why is the following statement true? Other things...Ch. 15 - Why do public utility companies usually have...Ch. 15 - Why is EBIT generally considered to be independent...Ch. 15 - If a firm went from zero debt to successively...Ch. 15 - Prob. 9QCh. 15 - Prob. 1P
Ch. 15 - Prob. 2PCh. 15 - Ethier Enterprise has an unlevered beta of 1.0....Ch. 15 - Nichols Corporations value of operations is equal...Ch. 15 - Lee Manufacturings value of operations is equal to...Ch. 15 - Dye Trucking raised $150 million in new debt and...Ch. 15 - Schweser Satellites Inc. produces satellite earth...Ch. 15 - Prob. 8PCh. 15 - Prob. 9PCh. 15 - Beckman Engineering and Associates (BEA) is...Ch. 15 - Prob. 11PCh. 15 - A. Fethe Inc. is a custom manufacturer of guitars,...Ch. 15 - Prob. 13SPCh. 15 - Prob. 1MCCh. 15 - Prob. 2MCCh. 15 - Prob. 4MCCh. 15 - Prob. 5MCCh. 15 - Prob. 6MCCh. 15 - Prob. 7MCCh. 15 - Prob. 10MCCh. 15 - Prob. 11MCCh. 15 - Prob. 12MC
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.Similar questions
- KMS corporation has assets of $650 million, $130 million of which are cash. It has debt of $162.5 million. Suppose that KMS decides to initiate a dividend, but it wants the present value of payout to be $65 million. If its cost of equity capital is 10.7%, to what amount per year in perpetuity should it commit (assuming perfect capital market)? KMS should commit to $ million per year. (Round to two decimal places.)arrow_forwardDuke Inc. is considering to change its capital structure of a $1 million:$3 million debt-equity mix (in terms of market values), by taking out a $3 million loan which is used to pay a large dividend to shareholders. The firm’s tax rate is 40%. After the dividend has been paid, what will be the firm’s total equity value?arrow_forwardBeckman Engineering and Associates (BEA) is considering a change in its capital structure. BEA currently has $20 million in debt carrying a rate of 6%, and its stock price is $40 per share with 2 million shares outstanding. BEA is a zero growth firm and pays out all of its earnings as dividends. The firm's EBIT is $13.863 million, and it faces a 30% federal-plus-state tax rate. The market risk premium is 4%, and the risk-free rate is 7%. BEA is considering increasing its debt level to a capital structure with 50% debt, based on market values, and repurchasing shares with the extra money that it borrows. BEA will have to retire the old debt in order to issue new debt, and the rate on the new debt will be 10%. BEA has a beta of 0.8 What are BEA’s WACC and total value of the firm with 50% debt? Do not round intermediate calculations. Round your answer to two decimal places. % What is the total value of the firm with 50% debt? Enter your answers in millions. For example, an answer…arrow_forward
- Vanderley Industries Ltd is currently valued at $900 million. Management is planning to repurchase $400 million of its issued shares by issuing non-maturing debt at a 5 per cent annual interest rate. Vanderley Industries is subject to a 30 per cent tax rate. Given all of the Modigliani and Miller assumptions, except the assumption that there is no tax, what value will Vanderley Industries have after the capital restructurearrow_forwardThe DEF Company is planning a $64 million expansion. The expansion is to be financed by selling $25.6 million in new debt and $38.4 million in new common stock. The before-tax required rate of return on debt is 0.086 and the required rate of return on equity is 0.125. If the company has a marginal tax rate of 0.26, what is the firm's cost of capital? Instruction: Type your answer as a decimal, and round to three decimal placesarrow_forwardABC Corporation is thinking of converting its all-equity structure of capital to 40% debt, 60% common equity. Currently, the company's 10,000 outstanding share are trading in the market at Rs 49 per share. Its EBIT is Rs 87,200 per year and is expected to remain same forever. If the company chooses to convert the all-equity stocks to debt, the interest rate on new debt would be 7%. The company is exempted to pay any tax due to its nature of business. a. Jack owns 200 shares of the company. What would be his total earnings under existing capital structure assuming that firm pays all its income as dividends? b. Under the proposed new capital structure, what earnings Jack can expect? Assume that he still holds all 200 shares. (Note that if the company chooses the new capital structure, it needs to borrow debt and repurchase some of its existing shares with that debt to make the proposed capital structure of 40% debt and 60% common equity). C. Assume that company decided to convert its…arrow_forward
- Suppose that Rose Industries is considering the acquisition of another firm in its industry for $137 million. The acquisition is expected to increase Rose's free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 4% every year thereafter. Rose currently maintains a debt to equity ratio of 1, its corporate tax rate is 21%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Rose Industries will maintain a constant debt-equity ratio for the acquisition. The Free Cash Flow to Equity (FCFE) for the acquisition in year O is closest to ($ Million) (2 decimal places):arrow_forwardThe Alcatel has a tax rate of 30%. The company can raise debt at a 12% interest rate and the last dividend paid by Alcatel was PO.90. Alcatel's common stock is selling for P8.59 per share, and its expected growth rate in earnings and dividend is 5%. If Alcatel issue new common stock, the flotation cost incurred will be 10%. Alacatel plans to finance all capital expenditures with 30% debt and 70% equity. a. What is alcatel's weighed average cost of capital if the firm has sufficient retained earnings to fund the equity portion of its capital budget? b. What is alcatel's weighted average cost of capital if the firm raised the equity portion by selling new shares of stock? c. What is the cost of equity if its retained earnings can cover only 60% of its equity requirements and the rest new issue of common shares will be sold? show solutionarrow_forwardBTC has 15M shares in an all-equity firm, at a price of $13 per share. The firm announced that they will borrow $100M to buy back shares (using the full amount of debt). They will keep this debt permanently. Upon announcement the share price increases to $16 per share. The corporate tax rate is 25%, taxes and financial distress costs are the only relevant market imperfections. What is the present value of the financial distress costs？arrow_forward
- Kohwe Corporation plans to issue equity to raise $50 million to finance a new investment. After making the investment, Kohwe expects to earn free cash flows of $10 million each year. Kohwe currently has 5 million shares outstanding, and has no other assets or opportunities. Suppose the appropriate discount rate for Kohwe's future free cash flows is 8%, and the only capital market imperfections are corporate taxes and financial distress costs. a. What is the NPV of Kohwe's investment? b. What is Kohwe's share price today? Suppose Kohwe borrows the $50 million instead. The finn will pay interest only on this loan each year, and maintain an outstanding balance of $40 million on the loan. Suppose that Kohwe's corporate tax rate is 35%, and expected free cash flows are still $9 million each year. c. What is Kohwe's share price today if the investment is financed with debt? Now suppose that with leverage, Kohwe's expected free cash flows wiH decline to $8 million per year due…arrow_forwardBarry's Ltd. is all equity financed with 18,000 shares outstanding and each share sells for $22. The EBIT of the company is $50,000. The company is debating of converting into a 40% debt capital structure, with 6% interest per annum. The cost of capital is currently 10%. Ignore taxes. You are required to answer the following: (a) What is the current market value of the company? (b) What is the market value of debt in the proposed debt capital structure? (c) How many shares must be repurchased in the proposed levered company?arrow_forwardBruce & Co. expects its EBIT to be $165,000 every year forever. The company currently has no debt but can borrow at 8.6 percent while its cost of equity is 14.7 percent. The tax rate is 21 percent. The company is planning to borrow $55,000 and use the loan proceeds to repurchase shares. What will be the WACC after recapitalization? Select one: 14.57 percent 15.07 percent 14.51 percent 14.11 percent 14.58 percentarrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Financial leverage explained; Author: The Finance story teller;https://www.youtube.com/watch?v=GESzfA9odgE;License: Standard YouTube License, CC-BY