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M&amp;MPracticeProblem

# M&amp;MPracticeProblem - Prof Doe is the CFO of the...

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Prof. Doe is the CFO of the unlevered firm, Gordon’s Green Growers Inc. that has EBIT of \$400,000 forever and pays all earnings as dividends to shareholders (ie. no growth). Gordon’s Green Growers Inc. has 360,000 shares outstanding. You have been provided the following information: EBIT 400,000 Un-levered ke 10% Tax Rate 40% T-bill rate 4% TSX 9% Value of Stock's Debt Kb Beta - 6% 1.20 500,000 6% 1.31 1,000,000 7% 1.51 1,500,000 9% 1.72 2,000,000 11% 2.07 2,500,000 14% 2.42 WACC Value of Value of % % Value of Firm Equity Debt Kb Debt Kd Equity Ke WACC - 6% 500,000 6% 1,000,000 7% 1,500,000 9% 2,000,000 11% 2,500,000 14% a. What is the market value of a share of the all equity firm (proposition I)? 000 , 400 , 2 10 . ) 40 . 1 )( 0 000 , 400 ( ) 1 )( ( = - - = - - = U E K T I EBIT E V 67 . 6 66667 . 6 000 , 360 000 , 400 , 2 = = = s o shares E price share b. The firm issues \$500,000 in debt (proposition II) and uses the cash to repurchase shares. Assuming the market is efficient, calculate the price the firm will need to offer its

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M&amp;MPracticeProblem - Prof Doe is the CFO of the...

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