Problem Set 1 - EF4313 Corporate Finance I Semester A 2008...

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EF4313 Corporate Finance I Semester A 2008 – 2009 Problem Set 1 Problem Set 1 1. May Burke, the financial manager of Leverage Unlimited, thinks she can increase shareholder value by increasing the leverage of the company. The company is currently all equity financed and is earning 20 percent. The company can borrow at 10 percent and the beta of the debt is at 0.4. The beta of equity before borrowing is 1.2. There are 10,000 shares outstanding and the price-earnings ratio of the common shares is 5 on an operating income of $25,000. The company can be expected to continue to generate that amount of operating income forever after the debt financing. Ms. Burke feels that the leverage will substantially raise the value of the firm and wants to buy back half the shares of the company. a. What is the value of the firm before financing? b. What is the value per share before financing? c.
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Problem Set 1 - EF4313 Corporate Finance I Semester A 2008...

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