902301 m Calculation of Total Value of Firm Total Value Present Value of 5

# 902301 m calculation of total value of firm total

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\$ 9,023.01 m Calculation of Total Value of Firm Total Value = Present Value of 5 years + Terminal Value 11382.98 = \$ 9023.3 = \$ 11382.98 million

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ou will need to growth rates sts 12.5% and s \$30.
Section 6 : Capital Structure a. Explain why component costs of debt and equity change as the debt ratio is incr b. Discuss one benefit and one risk of increasing financial leverage. Benefits of increasing leverage: Risk of increasing leverage: Disproportionate losses - Increasing financial leverage may present a p c. What is optimal capital structure and at what point does this occur? d. All Star Production Corporation (APC) is considering a recapitalisation plan that would c The recapitalisation proposal is to issue \$100 million of long-term debt at an interest rat (i) After the recapitalisation, calculate the number of shares outstanding (2 marks), the per share p After recapitalisation 600m = D +E = 100 +500 (ii) Before recapitalising, calculate the earnings per share (EPS) and ROE for APS s Debt equity ratio represents proportion between shareholder's equity and debts used to financ of company to repay its lenders out of shareholder's equity in the event business declines. Incre borrowing funds for expansion of business. With the increase of debt equity ratio, there is great of bankruptcy increases if business hits hard times. Hence, the component costs of debts and e shareholders can safeguard themselves with higher returns in terms of cost of debt and cost of ratio represents higher cost of capital as lenders and shareholders expects higher returns. a. Enhanced earnings - Increasing financial leverage may permit a com Optimal capital structure is the mixture of debt and equity which maximises the value of the fir shareholders value, thus even the capital structure should be one maximises it. i. Before Recapitalization 12m * 50 = 600m D/E = 100/500 = 0.2

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ROE = \$5 / \$50 = 10% EPS = \$60m / 12m = \$5 per share (iii) After recapitalising what is the new EPS and ROE EPS = \$60m - \$6.5m / 10m shares = \$53.5m / 10m = \$5.35 per share ROE = \$5.35 / \$50 x 100 = 10.7% e. (i) What is market value (1 mark) and required return of this firm’s stock (1 mark) (ii) What is the market value and required return of this firm’s remaining stock aft Issues 1m debt VF = 2M = 12.5 + 1/1(12.5 – 5) 0.2 f. Hero Mining has EBIT of \$5 million. It has \$50 million of debt with a required retu (i) What is the present value of the tax shield for Hero Mining? PV of tax shield = 0.4 x \$50m = \$20m (ii) What is the total value of the firm? Vu = ( EBIT x (1-Tc) / ra = \$5m x 0.6 / 0.12 = \$25m VL = Vu + TcD = \$25m + \$20m = \$45m g. An unlevered company operates in perfect markets and has earnings before inte 12.5%. Suppose the firm issues \$1million worth of debt with a required return of Market Value = 250,000/.125 = 2M Required Return = K e = K o = 12.50% i. After Repurchase R e = r a +D/E (r a - r d )
An unlevered company operates in perfect markets and has EBIT of \$2 million. A (i) What is the market value (1 mark) and required return on this firm’s stock (1 mar = 2 Million / 8% = 25 million = 2 / 25 X 100 = 8% (ii) What is the market value (1 mark) and required return (2 marks) of this firm’s rem h.

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