Question

•Blue Inc. has no debt and is expected to generate $4 million in EBIT in perpetuity. Tc=30%. All after-tax earnings are paid as dividends.The firm is considering a restructuring, with a perpetual fixed $10 million in floating rate debt at an expected interest rate of 8%. The unlevered cost of equity is 18%.

•What is the current value of Blue?

•What will the new value be after the restructuring?

•What will the new required return on equity be?

•What if we use the new WACC?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

DE C w ENG 01:33 30-07-2020 99+ 32 Х C1123 . A B C D E F G H 1 1122 1123 1124 1125 1126 1127 1128 1129 1130 VALUE OF ALL EQUITY FIRM = VALUE OF ALL EQUITY FIRM = VALUE OF ALL EQUITY FIRM = VALUE OF ALL EQUITY FIRM = EBIT*(1-t)/ko 4* (1-0.3)/0.18 15.56 million 15555555.56 OR 2 VALUE OF LEVERED FIRM = TAX RATE 1131 VALUE OF LEVERED FIRM = VALUE OF ALL EQUITY FIRM + DEBT 15.56 + (10 X 3%) 15.8556 million VALUE OF LEVERED FIRM = VALUE OF LEVERED FIRM = OR 15855555.56 1132 1133 1134 1135 1136 1137 3 10 VALUE OF DEBT = D VALUE OF EQUITY = S 5.8556 1138 COST OF LEVERED EQUITY ke = k0 + (ko-kb)(D/S)*(1-t) ke = 18% + (18% - 8%)*(10/5.8556)*(1-0.3) = 29.95% 1139 1140 1141 1142 1143 1144 1145 4 WACC = WACC = We*ke + Wb*Kb*(1-t) (5.8556/15.8556)*(29.95%) + (10/15.8556)*(8%)*(1-0.3) 14.59% WACC = CALCULATOR LOAN OPTIONS pv, fv, annuity CAP STRU VALUE PM , PMT | loan with points LOCK BOX DILUTION DOLLAR COST AVG EXPO NPE ... +