a)
To compute: The combined value of equity and debt in the two existing companies
Introduction:
Value of equity is the amount that comprises of the firm’s capital structure as equity shares. It is the total contribution of the equity shareholders to the firm. Value of debt is the amount that comprises of the firm’s capital structure as debt. It is the total contribution of the debt-holders to the firm.
b)
To compute: The value of equity and debt of the new firm.
Introduction:
Value of equity is the amount that comprises of the firm’s capital structure as equity shares. It is the total contribution of the equity shareholders to the firm. Value of debt is the amount that comprises of the firm’s capital structure as debt. It is the total contribution of the debt-holders to the firm.
c)
To calculate: The gain or loss for the shareholders and the bondholders.
Introduction:
Value of equity is the amount that comprises of the firm’s capital structure as equity shares. It is the total contribution of the equity shareholders to the firm. Value of debt is the amount that comprises of the firm’s capital structure as debt. It is the total contribution of the debt-holders to the firm.
d)
To discuss: The impact of a merger on shareholders.
Introduction:
Value of equity is the amount that comprises of the firm’s capital structure as equity shares. It is the total contribution of the equity shareholders to the firm. Value of debt is the amount that comprises of the firm’s capital structure as debt. It is the total contribution of the debt-holders to the firm.
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FUND. OF CORPORATE FINANCE >MSU<
- A3)  Time remaining: 00:09:42 Finance Smartworks is considering a potential buyout of Redwords. The manager of Smartworks believes that the value of Redwords will rise by 50% if Smartworks purchases Redwords and changes its management. Redwords is a listed company with 10 million shares outstanding, and its share price is only $15 per share now. Smartworks is going to use a leveraged buyout with an offer of $20 per share to control Redwords. If Smartworks obtains 100% control of Redwords, the share price of Redwords after the leveraged buyout will be closest to: a. $1.00. b. $15.00. c. $20.00. d. $3.00.arrow_forward5 Dye Industries currently uses no debt, but its new CFO is considering changing the capital structure to 40.0% debt (wd) by issuing bonds and using the proceeds to repurchase and retire common shares so the percentage of common equity in the capital structure (wc) = 1 – wd. Given the data shown below, by how much would this recapitalization change the firm's cost of equity, i.e., what is rL - rU?Risk-free rate, rRF 6.00% Tax rate, T 30%Market risk premium, RPM 4.00% Current wd 0%Current beta, bU 1.15 Target wd 40% Group of answer choices 1.66% 2.15% 2.23% 2.02% 2.45% 1.84%arrow_forward16.H-Model (LO2, CFA6) The dividend for Should I, Inc., is currently $1.25 per share. It is expected to grow at 20 percent next year and then decline linearly to a 5 percent perpetual rate beginning in four years. If you require a 15 percent return on the stock, what is the most you would pay per share?arrow_forward
- Q.An unlevered company that has a current value of $1,600,000 is considering borrowing $700,000 and using the borrowed funds to repurchase shares. The company can borrow at 5% and has a cost of equity of 13%. EBIT is expected to remain the same every year forever. Assume all available earnings are immediately distributed to common shareholders and all the M&M assumptions are satisfied. What is the company's EBIT according to M&M Proposition I without taxes?arrow_forwardH3. The value of HILEV firm at the end of one year can be $50 m or $100 m with equal probability of 0.5. The firm has debt with a face value of $50 m that matures in one year. Assume that investors are risk-neutral and the risk free rate is zero. The CEO of the firm decides to substitute assets of the firm with more risky assets immediately, so that the value of the firm at the end of one year is either $30 m or $120 m with equal probability of 0.5. This asset substitution will lead to A. A gain of $10 million for stockholders and a loss of $10 million for bondholders B. A loss of $10 million for stockholders and a gain of $10 million for bondholders C. No gain or loss to debtholders or equity holders D. Both debtholders and equity holders will lose $10 million from the increased risk of the business Show proper step by step calculationarrow_forward02) Overnight Publishing Company(OPC) has $2.5 million in excess cash. The firm plans to use this cash either to retireall of its outstanding debt or to repurchase equity. The firm’s debt is held by oneinstitution that is willing to sell it back to OPC for $2.5 million. The institution will notcharge OPC any transaction costs. Once OPC becomes an all-equity firm, it will remain unlevered forever. If OPC does not retire the debt, the company will use the $2.5 million in cash to buy back some of its stock on the open market. Repurchasing stock also hasno transaction costs. The company will generate $1,300,000 of annual earnings beforeinterest and taxes in perpetuity regardless of its capital structure. The firm immediatelypays out all earnings as dividends at the end of each year. OPC is subject to a corporatetax rate of 35 percent, and the required rate of return on the firm’s unlevered equity is20 percent. The personal tax rate on interest income is 25 percent, and there are no taxeson…arrow_forward
- What is the HHI for a market with 4 firms, each with one quarter of the market share? 1000 15000 2500 3000 Suppose there is a proposed merger between two of the firms in this market. The resulting market would be 3 firms, two with 25% of the market share and one with 50%. What would the new HHI be? 2950 3190 3700 3750 Is it likely that this merger will be challenged? yes no not enough information to tellarrow_forwardP7–15 Common stock value: All growth models You are evaluating the potential purchaseof a small business currently generating $42,500 of after-tax cash flow(D0 = $42,500). On the basis of a review of similar-risk investment opportunities,you must earn an 18% rate of return on the proposed purchase. Because you are relatively uncertain about future cash flows, you decide to estimate the firm’s value using several possible assumptions about the growth rate of cash flows.a. What is the firm’s value if cash flows are expected to grow at an annual rate of0% from now to infinity?b. What is the firm’s value if cash flows are expected to grow at a constant annualrate of 7% from now to infinity?c. What is the firm’s value if cash flows are expected to grow at an annual rate of12% for the first 2 years, followed by a constant annual rate of 7% from year 3to infinity?arrow_forward61. Suppose a new company decides to raise its initial $200 million ofcapital as $100 million of common equity and $100 million of long-termdebt. By an iron-clad provision in its charter, the company can neverborrow any more money. Which of the following statements is mostcorrect?a. If the debt were raised by issuing $50 million of debentures and $50million of first mortgage bonds, we could be absolutely certain thatthe firm’s total interest expense would be lower than if the debtwere raised by issuing $100 million of debentures.b. If the debt were raised by issuing $50 million of debentures and $50million of first mortgage bonds, we could be absolutely certain thatthe firm’s total interest expense would be lower than if the debtwere raised by issuing $100 million of first mortgage bonds.c. The higher the percentage of total debt represented by debentures,the greater the risk of, and hence the interest rate on, thedebentures.d. The higher the percentage of total debt represented by…arrow_forward
- Assume the following scenario Company A (Wants Fixed) Company B (Wants Float) Company C (Wants Float) Fixed 8% 7% 10% Float 7% 8% 10% Amount $1,000,000 $500,000 $500,000 How much does each company save by engaging in interest rate swaps if we assume each company shares the benefits evenly with their counterparty.arrow_forwardCompany X is considering an expansion. The project has an estimated internal rate of return equal to 8%. The company has a debt to equity ratio equal to one. The yield to maturity on its bonds is 5%, while the cost of the company’s equity is estimated to be 15%. The company’s CEO, who is keen on the expansion project, argues that the project would be profitable if the company were to entirely finance it by issuing debt. The CFO, however, is sceptical and believes there is a logical flaw in the CEO’s argument. Who do you think is right? In no more than 200 words, give reasons for your answer by referencing relevant corporate finance theories.arrow_forward
- EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT