Consider an all‐equity firm with EBIT of $10MM, expected to stay at that level over time....
Consider an all‐equity firm with EBIT of $10MM, expected to stay at that level over time. There is no depreciation and no investment: all after‐tax earnings paid as dividends. The current market capitalization is $100MM. There are 10MM shares, which are priced at $10 per share. The corporate tax rate is 30%.
a. What are the after‐tax earnings?
b. What is the discount rate the market uses to value equity cash flows?
c. If there were no taxes, what value would the market put on the firm’s entire cash flows?
d. If the risk‐free rate is 5% and the market risk premium is 6%, what is the beta of this firm’s cash flows according to the CAPM?
Homework Answers
I have tried to answer all the questions. Please let me know for any clarifications.Hope this helps!
Add Answer to:
Consider an all‐equity firm with EBIT of $10MM, expected to stay
at that level over time....
Consider an all‐equity firm with EBIT of $10MM, expected to stay at that level over time....
Consider an all‐equity firm with EBIT of $10MM, expected to stay at that level over time. There is no depreciation and no investment: all after‐tax earnings paid as dividends. The current market capitalization is $100MM. There are 10MM shares, which are priced at $10 per share. The corporate tax rate is 30%. Now suppose the firm issues $80MM in perpetual debt (i.e., a perpetuity) at an interest rate of 5% per year and uses debt proceeds to buys back shares....
An all-equity firm has 250,000 shares outstanding. The firm’s assets will generate an expected EBIT of...
An all-equity firm has 250,000 shares outstanding. The firm’s assets will generate an expected EBIT of $2,000,000 per year (beginning one year from today) in perpetuity. The firm will make no new capital or working capital investments and all assets are fully depreciated. The assets have a beta of 1.5, therisk-free rate is 5%, and the market risk premium is 5%. The financial analysts at the firm have estimated the optimal capital structure to be wd= 40%; we= 60% (or,...
LP Bean Company, an all equity company, has an EBIT of $1,200,000 that it expects it...
LP Bean Company, an all equity company, has an EBIT of $1,200,000 that it expects it will earn forever, and it pays all of its earnings as dividends to shareholders (i.e., no growth). The firm has a corporate tax rate of 45% and has an un-levered beta of 1.25. In the market, you observe that Government T-bills are being sold to yield 3% and the market risk premium is 6%. Assume a world of taxes and a cost for the...
Trivoli Inc. is an all-equity firm with 1,000,000 shares outstanding. The company's EBIT is $2,500,000, and...
Trivoli Inc. is an all-equity firm with 1,000,000 shares outstanding. The company's EBIT is $2,500,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, so its earnings per share (EPS) equals its dividends per share (DPS). The company's tax rate is 25%. The company is considering issuing $3.25 million worth of bonds (at par) and using the proceeds for a stock repurchase. If issued, the bonds would have an estimated...
I am confused about this problem. Thank you! LevBuyout Corp is an all equity firm. It has 20 million shares. EBIT is exp...
I am confused about this
problem. Thank you!
LevBuyout Corp is an all equity firm. It has 20 million shares. EBIT is expected to be $75 million in one year, and to grow by 5% per year in perpetuity. LevBuyout's (equity) beta is 0.8, the risk-free rate is 3%, and the market risk premium is 10%. The corporate tax rate is 20%. LevBuyout is considering doing a leveraged recapitalization, i.e., issuing debt to buy back some shares. (a) What is...
Company X currently is an all-equity firm with an expected return of 6.6%. It faces no...
Company X currently is an all-equity firm with an expected return of 6.6%. It faces no corporate taxes and perfect capital markets. If the firm borrows to the point that its debt-to-equity ratio is 1.3, the required return on debt will be 5.4%. What will the required return on equity be in that case? Report an answer to two decimal places, like 8.03 for 8.03%. Question 5 5 pts Afirm's stock has beta 1.2 and P/E ratio 17.9. The risk-free...
An all-equity firm just paid $4 per share dividend and for foreseeable future, will reinvest 65% of its earnings in proj...
An all-equity firm just paid $4 per share dividend and for foreseeable future, will reinvest 65% of its earnings in projects that are expected to provide 10% RoR forever. If the treasury yield is 1.5%, the market risk premium is 7% and the firm’s beta is 1.5, then calculate the firm’s EPS and Share Price. What is the present value of the growth opportunities for the firm? If the growth can be achieved with debt at 5%, such that D:E...
CCC Company currently does not use any debt at all (it is an all-equity firm). The...
CCC Company currently does not use any debt at all (it is an all-equity firm). The firm has 1,000,000 shares selling for $40 per share. Its beta is 0.6, and the current risk-free rate is 2%. The expected market return for the coming year is 14%. CCC Company will sell $20,000,000 in corporate bonds with a $1,000 par value. The bonds have a yield to maturity of 10%. When the bonds are sold, the beta of the company will increase...
Question 1 a. Kappa is an all-equity firm. It has 120,000 shares outstanding, currently worth £20...
Question 1 a. Kappa is an all-equity firm. It has 120,000 shares outstanding, currently worth £20 per share. The unlevered cost of equity is 20%. The firm has decided to issue £1,000,000 of 8% debt, and to use the proceeds to repurchase shares. Assume a 28% corporate tax rate. i. According to Modigliani-Miller Proposition I with corporate taxes, what is the market value of the firm’s equity after the repurchase? (6 marks) ii. What are the firm’s earnings before interest...
Globex Corp. is an all-equity firm, and it has a beta of 1. It is considering...
Globex Corp. is an all-equity firm, and it has a beta of 1. It is
considering changing its capital structure to 65% equity and 35%
debt. The firm’s cost of debt will be 10%, and it will face a tax
rate of 25%.
What will Globex Corp.’s beta be if it decides to make this
change in its capital structure?
a)1.40
b)1.47
c)1.26
d)1.54
US Robotics Inc. has a current capital structure of 30% debt
and 70% equity. Its current...
Trivoli Inc. is an all-equity firm with 1,000,000 shares outstanding. The company's EBIT is $2,500,000, and EBIT is expected to remain constant over time. The company pays out all of its earnings each year, so its earnings per share (EPS) equals its dividends per share (DPS). The company's tax rate is 25%. The company is considering issuing $3.25 million worth of bonds (at par) and using the proceeds for a stock repurchase. If issued, the bonds would have an estimated...
I am confused about this
problem. Thank you!
LevBuyout Corp is an all equity firm. It has 20 million shares. EBIT is expected to be $75 million in one year, and to grow by 5% per year in perpetuity. LevBuyout's (equity) beta is 0.8, the risk-free rate is 3%, and the market risk premium is 10%. The corporate tax rate is 20%. LevBuyout is considering doing a leveraged recapitalization, i.e., issuing debt to buy back some shares. (a) What is...
Company X currently is an all-equity firm with an expected return of 6.6%. It faces no corporate taxes and perfect capital markets. If the firm borrows to the point that its debt-to-equity ratio is 1.3, the required return on debt will be 5.4%. What will the required return on equity be in that case? Report an answer to two decimal places, like 8.03 for 8.03%. Question 5 5 pts Afirm's stock has beta 1.2 and P/E ratio 17.9. The risk-free...
CCC Company currently does not use any debt at all (it is an all-equity firm). The firm has 1,000,000 shares selling for $40 per share. Its beta is 0.6, and the current risk-free rate is 2%. The expected market return for the coming year is 14%. CCC Company will sell $20,000,000 in corporate bonds with a $1,000 par value. The bonds have a yield to maturity of 10%. When the bonds are sold, the beta of the company will increase...
Globex Corp. is an all-equity firm, and it has a beta of 1. It is
considering changing its capital structure to 65% equity and 35%
debt. The firm’s cost of debt will be 10%, and it will face a tax
rate of 25%.
What will Globex Corp.’s beta be if it decides to make this
change in its capital structure?
a)1.40
b)1.47
c)1.26
d)1.54
US Robotics Inc. has a current capital structure of 30% debt
and 70% equity. Its current...
Most questions answered within 3 hours.
-
Compute the standard deviation for a sample with the following
information and then choose the correct...
asked 4 minutes ago -
Two parallel circular rings, each 10.0 cm in radius, are 1.00 mm
apart. At this point,...
asked 11 minutes ago -
Under what circumstances do bacteria engage in a true
sexual life cycle
A. During conjugation, when...
asked 13 minutes ago -
User interviews can be useful in user experience design. There
are many different questions that can...
asked 11 minutes ago -
Given the two reactions
H2S⇌HS−+H+,
K1 = 9.87×10−8, and
HS−⇌S2−+H+,
K2 = 1.40×10−19,
what is the...
asked 17 minutes ago -
Adams Camps, Inc. leases the land on which it builds camp sites.
Adams is considering opening...
asked 26 minutes ago -
An Olympic archer misses the bull's-eye 11% of the time.
Assume each shot is independent of...
asked 33 minutes ago -
a gas cylinder in the lab contains 12.0 ft3 of some gas at 70ºF
and 100psia....
asked 32 minutes ago -
Consider the data in the following table regarding the age of a
particular model of car...
asked 37 minutes ago -
She estimates the following model as Rent = β0 + β1 Bedroom + β2
Bath +...
asked 58 minutes ago -
Prove that the following is a valid cumulative distribution
function
F(x) = x/(1+x) for a>=0
0...
asked 1 hour ago -
Sal's satellite company broadcasts TV to subscribers in Los
Angeles and New York. The demand functions...
asked 50 minutes ago