Mercer Inc. has a debt-to-equity ratio of 0.40. The required return on the company’s unlevered equity is 12%, and the pretax cost of the firm’s debt is 8%. Sales revenue for the company is expected to remain stable indefinitely at last year’s level of $18,300,000. Variable costs (including SG & A expenses) are 65 percent of sales. The corporate tax rate is 29%. The company distributes all its earnings as dividends at the end of each year.
a. If the company were financed entirely by equity, how much would it be worth?
b. What is the required return on the company’s levered equity?
c. Use the weighted average cost of capital (WACC) approach to calculate the value of the company. What is the value of the company’s equity? What is the value of the company’s debt?
d. Use the flow to equity (FTE) approach to calculate the value of the company’s equity (Hint: use the value of debt calculated in part c to calculate interest expense).
Mercer Inc. has a debt-to-equity ratio of 0.40. The required return on the company’s unlevered equity is 12%, and the pretax cost of the firm’s debt is 8%. Sales revenue for the company is expected to remain stable indefinitely at last year’s level of $18,000,000+$100,000. Variable costs (including SG & A expenses) are 65 percent of sales. The corporate tax rate is 26%+(1%). The company distributes all its earnings as dividends at the end of each year. a. If the company...
Bluegrass Mint Company has a debt-equity ratio of .35. The required return on the company's unlevered equity is 12.1 percent and the pretax cost of the firm's debt is 6.3 percent. Sales revenue for the company is expected to remain stable indefinitely at last year's level of $18.6 million. Variable costs amount to 60 percent of sales. The tax rate is 21 percent and the company distributes all its earnings as dividends at the end of each year. (a) If...
Bluegrass Mint Company has a debt-equity ratio of .35. The required return on the company's unlevered equity is 12.1 percent and the pretax cost of the firm's debt is 6.3 percent. Sales revenue for the company is expected to remain stable indefinitely at last year's level of $18.6 million. Variable costs amount to 60 percent of sales. The tax rate is 21 percent and the company distributes all its earnings as dividends at the end of each year. (a) If the...
12. APV MVP, Inc., has produced rodeo supplies for over 20 years. The company currently has a debt-equity ratio of 50 percent and is in the 40 percent tax bracket. The required return on the firm's levered equity is 16 percent. The company is planning to expand its production capacity. The equipment to be purchased is expected to generate the following unlevered cash flows: Year Cash Flow O $15,100,000 5,400,000 8,900,000 8,600,000 The company has arranged a debt issue of...
Roger, Inc., has a debt-equity ratio of 2.85. The firm’s weighted average cost of capital is 10 percent and its pretax cost of debt is 6 percent. The tax rate is 24 percent. a. What is the company’s cost of equity capital? b. What is the company’s unlevered cost of equity capital? c. What would the company’s weighted average cost of capital be if the company's debt-equity ratio were .25 and 1.85?
Lone Star Industries just issued $800 of perpetual 12% debt and used the proceeds to repurchase stock. The company expects to generate $185 of earnings before interest and taxes in perpetuity. Lone Star distributes all of its earnings as dividends at the end of each year. The firm’s unlevered cost of capital is 18% and the corporate tax rate is 40%. A.What is the value of Lone Star as an unlevered firm? B.Use the Adjusted Present Value Method to calculate...
Dickson, Inc., has a debt-equity ratio of 2.4. The firm’s weighted average cost of capital is 9 percent and its pretax cost of debt is 7 percent. The tax rate is 25 percent. a. What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer...
Dickson, Inc., has a debt-equity ratio of 2.5. The firm’s weighted average cost of capital is 11 percent and its pretax cost of debt is 9 percent. The tax rate is 22 percent. a. What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your...
Dickson, Inc., has a debt-equity ratio of 2.25. The firm’s weighted average cost of capital is 10 percent and its pretax cost of debt is 7 percent. The tax rate is 22 percent. a. What is the company’s cost of equity capital? (Do not round intermediate calculations and enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) b. What is the company’s unlevered cost of equity capital? (Do not round intermediate calculations and enter your answer...
Whitewater Inc. has a debt of 20,000,000 Euro and the value of levered equity is 14,500,000 Euro. The company keeps a constant debt policy. Also the company has a constant and perpetual EBITDA. Knowing that the corporate tax rate is 36% and that the unlevered return on equity is 12.00% what is the unlevered cash flow of the company at the end of each year? A. 3,276,000 B. 3,882,931 C. 4,105,718 D. 4,200,501 The correct answer is A