Problem 1 Before restrucAfter restructuring Market Value of Debt 80000 40000

Problem 1 before restrucafter restructuring market

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Problem 1 Before restrucAfter restructuring Market Value of Debt $800.00 $400.00 Market Value of Equity $200.00 $800.00 Interest Expense $100.00 $30.00 Operating Income $75.00 $100.00 Part a. Current beta = 3.04 Cost of equity = 17.200% Pre-tax cost of debt = 0.125 Effective tax rate = 0.3 After-tax cost of debt = 0.0875 Debt to Capital = 80.00% Cost of capital = 10.44% Part b Unlevered beta = 0.80 New D/E ratio = 0.5 Levered beta = 1.04 Cost of equity = 7.2000% Cost of debt = 0.075 After-tax cost of debt - 0.045 Debt to Capital = 33.333% Cost of capital = 6.30% Problem 2 EV before buyback = 2000 ! All equity Number of shares = 100 Cost of capital before = 12% Cost of capital after = 10% Change in value = 300 EV after buyback = $2,300.00 Debt outstanding $1,200.00 Value of equity $1,100.00 Value per share $25.00 Number of shares outstan 44 Shares bought back = 56 Buyback price= $21.43 Problem 3 Acquiring firmTarget firm Market value of Equity $1,000 $500 Net Debt outstanding $400 $100 Duration of assets 4 10 Duration of debt 2 15 Enterprise Value (Value o $1,400 $600
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Duration of assets after a 5.8 New Debt issued for acqu 500 Total Debt outstanding af 1000 Duration of new debt = 7
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Grading Template 1. Did not adjust tax rate: - 1 point 2. Did not compute cost of equity correctly: -1/2 point 3. Did not compute pre-tax cost of debt: -1/2 point 1. Did not unlever beta: -1 point 2. Did not compute cost of equity correctly: -1/2 point 3. Did not compute after-tax cost of debt: -1/2 point 1. Did not compute change in firm value correctly: -1 point 2. Did not set up for computing buyback price: -1 point 3. Math errors: -1/2 point each
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1. Did not compute duration of assets after merger: -1 point 2. Did not compute weighted duration of new debt: -1 point 3. Math errors: -1/2 point each
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Problem 1 Old Equity 150 Current Cost of equity 7.40% ! Equal to cost of capital Beta 0.9 ! (Cost of equity - Risk free rate)/ ERP New Debt = 50 New Equity = 100 ! After special dividends D/E ratio = 0.5 Debt/Capital ratio = 0.33333333 Note New levered beta = 1.17 If you left equity unchanged Cost of equity = 9.0200% I do, but for all the wrong re Let X be the new cost of debt debt ratios you used in your 9.02% (1-.3333) + X (1-.4) (.3333) = 7.40% Debt/Capital will 0.25, and t X (Pre-tax cost of debt) = 6.9333% ! Your solution may match this, but you still Problem 2 Equity $ 200.00 Debt $ 800.00 Firm Value $ 1,000.00 Cost of capital currently 10% Equity Issued in recap = $ 300.00 Cost of capital after = 9.00% Increase in value = $ 111.11 Value of firm after recap = $ 1,111.11 ( You can arrive at the same answer Debt outststanding after recap = $ 500.00 by dividing your increase in value by Value of equity affer recap $ 611.11 total number of shares outstanding, # Shares after recap 50 and adding to the prior price) Value per share $ 12.22 Problem 3 Market cap = 1000 Debt 500 Value of firm = 1500 Duration of assets 10 Duration of current debt = 5 Value of target 1000 Duration of target firm assets 4 Duration of assets after merger 7.6 ! (1500/2500)*10+(1000/2500)*4 New Debt = 1000 (500) *5 + (1000)* X = 7.6 ! X is the duration of new debt Duration of new debt 8.9
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Grading template 1. Did not reduce equity for special dividend: -1 point 2. Did not back out beta from cost of equity: -1 point 3. Did not relever beta after recap: -1 point 4. Forgot to after-tax cost of debt: -1/2 point 5. Math errrors: -1/2 point each d after the special dividend, you may get the same answer that easons. So, please don't check the final answer but also the
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