Assignment3 - Assignment 3 Corporate Finance II (ACTSC372)...

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Assignment 3 Corporate Finance II (ACTSC372) Due date: March 20, 5:00pm. Outside MC 6016 1. The market value of a firm with $500,000 of debt is $1.7 million. The pretax interest rate on debt is 10 percent per annum, and the company is in the 34 percent tax bracket. The company expects $306,000 of earnings before interest and taxes every year in perpetuity. (a). What would the value of the firm be if it were financed entirely with equity? (b). What amount of the firm’s annual earnings is available to shareholders? 2. Strider Publishing Company, an all-equity firm, expects perpetual earnings before interest and taxes (EBIT) of $2.5 million per year. Strider’s after-tax, all-equity discount rate is 20 percent. The firm is subject to a 34 percent corporate tax rate. (a). What is the value of Strider Publishing? (b). If Strider issues $600,000 of debt and uses the proceeds to repurchase stock, what will the value of the firm be? (c). Explain any difference in your answers to (a) and (b). (d). What assumptions are you making when valuing Strider? 3. Green Manufacturing, Inc., plans to announce that it will issue $2 million of perpetual debt and use the proceeds to repurchase common stock. The bonds will have a 6 percent annual coupon rate. Green is currently an all-equity firm worth $10 million with 500,000 shares of common stock outstanding. After the sale of the bonds, Green will maintain the new capital structure indefinitely. Green currently generates annual pretax earnings of $1.5 million. This level of earnings is expected to remain constant in perpetuity. Green is subject to a corporate tax rate of 40 percent.
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(a). What is the expected return on Green’s equity before the
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This note was uploaded on 01/17/2011 for the course ACTSC 372 taught by Professor Maryhardy during the Spring '09 term at Waterloo.

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Assignment3 - Assignment 3 Corporate Finance II (ACTSC372)...

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