M&M class Problem - Solutions Handout#2 Problem#1...

Solutions - Handout #2:
Problem #1 - Assume M&M no tax, no bankruptcy and perfect markets
Midas Mining Company (MMC) is a publicly-traded company. Now it has a total market value
of $200 million, consisting of 2 million shares of common stock and $75 million of 10%
perpetual bonds currently selling at par. The firm pays out all earnings as dividends. The firm is
expecting EBIT of $30 million to last forever.
a) What is the value of the firm?
b) What is the cost of equity?
c) What is the WACC?
d) What is the market price of a share, the number of outstanding shares, and EPS?
SOLUTION:
NO TAX
a) MV = 200 million
b) First find:
= 15%
= .15 + (.15-.10) (75/125) = 18%
Or:
= 18.00%
c)
WACC = 125/200(.18) + 75/200(.10) = 15%
d) Share price
Share price = 200 million – 75 million = 125,000,000 / 2,000,000 shares = $62.50
= $11.25
Now, MMC plans to change its capital structure without affecting its investment.
Specifically, it intends to increase the current debt level to $150 million (without affecting its
current debt cost). The money raised from the sale of debt will be used to repurchase some
of the firm’s outstanding shares.