assignment 5

assignment 5 - FINC 727: Corporate transactions and...

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FINC 727: Corporate transactions and business valuation Professor Robert Hansen 1 Assignment 5. HLTs BLAZER TELECOM’s perpetual earnings before interest and taxes is $400, the corporate tax rate is 40%. To help finance the project BLAZER will use a debt-to-equity ratio of 0.75. The debt will be priced to yield the risk-free rate of interest. BLAZER's depreciation expenses are not tax deductible and just offset capital expenditures in each year, and changes in working capital are zero. BLAZER has a 100% payout policy. We know the risk-free interest rate is 8% and the market premium (market rate less the risk-free rate) is 8.5%. We don’t know BLAZER's asset beta, but we believe Comp Co.’s assets have the same risk as our project. We also know that Comp’s debt is $13,945 and the market value of its equity is $7,000, their tax rate is 36%, their debt beta is 0.3725, and their equity beta is known to be 1.80. BLAZER also wants to add a short term layer of “tier 2 debt”, initially $1000 of junior, risky debt to the financing, whose beta is 0.50, accompanied by a stock repurchase for
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assignment 5 - FINC 727: Corporate transactions and...

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