Question

1.05 1.03 O 1.02 5 pts Question 4 Yellow Hammer Construction is considering a change in its capital structure. The company has $15 million in debt carrying a rate of 7%, and its stock price is $60 per share with 2 million shares outstanding. Homestead is a zero- growth form and pays out all of its earnings as dividends. The firm's EBIT is $30.5 million, and it faces a 40% federal- plus-state tax rate. The market risk premium is 6%, the risk-free rate is 4%, and the company has a beta of 1.2. Homestead is considering increasing its debt level to a capital structure with 25% debt, based on market values, and repurchasing shares with the extra money that it borrows. The company will retire old debt in order to issue new debt, and the rate on the new debt will be 8% What is the value of the firm with 25% debt? $200,864,082 $204,567,913 $178,922,237 $199,816,562 D Question 5 5 pts MONOPOL

Answer 1

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© v 1x ENG 01:32 08-05-2020 24 AF28 AF AG AH AI AJ AK AL AM AN AO . 7-5--2020 YELLOW HAMMER D = 15, S = 60 x 2 = 120, LEVERED BETA =1.2 unlevered beta = levered beta/(1+ (D/S)(1-t)) unlevered beta = 1.2/(1+(15/120)(1-0.4)) = 1.1163 releveraging beta levered beta = unlevered beta*(1 + (D/S)(1-t)) levered beta = 1.3395*(1 + (25/75)(1-0.4)) = 1.3395 Ke = Rf + beta (Rm-Rf) Ke = 4% + 1.3395(6%)= 12.04% wacc = wd*kd(1-t) + we*ke wacc = 0.25*8%*(1-0.4) +0.75*12.04% = 10.23% value of firm = EBIT(1-t)/WACC value of firm = 30.5(1-0.4/0.1023 = 178.922237 million ANSWER: 178922237 ... EAC MACRS RELEVANT MI-np-ir BETA LEVERED NPV REPLACEMENT BOND OPTION TO WAIT STEIN indiffEPS EBIT OCF 1 LEASE SLM MACRS G... 1