B what is the value of the companys equity 5565

This preview shows page 4 - 5 out of 5 pages.

b. What is the value of the company’s equity?
19. You need to estimate the value of Laputa Aviation. You have the following forecasts (in millions of dollars) of its profits and of its future investments in new plant and working capital: From year 5 onward, EBITDA, depreciation, and investment are expected to remain unchanged at year-4 levels. Laputa is financed 50% by equity and 50% by debt. Its cost of equity is 15%, its debt yields 7%, and it pays corporate tax at 40%. a. Estimate the company’s total value.
b. What is the value of Laputa’s equity?
20. An analyst at Dawn Chemical notes that its cost of debt is far below that of equity. He concludes that it is important for the firm to maintain the ability to increase its borrowing because if it cannot borrow, it will be forced to use more expensive equity to finance some projects. This might lead it to reject some projects that would have seemed attractive if evaluated at the lower cost of debt. Comment on this reasoning. 21. “The after - tax cost of debt is lower when the firm’s tax rate is higher; therefore, the WACC falls when the tax rate rises. Thus, with a lower discount rate, the firm must be worth more if its tax rate is higher.” Explain why this argument is wrong. 22. Here is a simplified balance sheet for Epicure Pizza (figures in $ millions): Assets $ Liabilities and Shareholders’ Equity Current assets 80 Current liabilities Fixed assets 125 Long-term debt Equity 80 Total 205 Total $ 60 65 205
Note: There are 16 million shares outstanding. Epicure shares are currently priced at $12 each. a. You wish to calculate Epicure’s WACC. What is the relevant figure for the company’s debt ratio? b. You now realize that since Epicure issued its debt, interest rates have fallen substantially. Do you need to revise your measure of the debt ratio upward or downward? 23. Binomial Tree Farm’s financing includes $5 million of bank loans and $6 million book value of 10-year bonds, which are selling at 95% of par value. Its common equity is shown in Binomial’s Annual Report at $6.67. It has 500,000 shares of common stock outstanding which trade on the Wichita Stock Exchange at $18 per share. What debt ratio should Binomial use to calculate its WACC? 24. Olympic Sports has two issues of debt outstanding. One is a 9% coupon bond with a face value of $20 million, a maturity of 10 years, and a yield to maturity of 10%. The coupons are paid annually. The other bond issue has a maturity of 15 years, with coupons also paid annually, and a coupon rate of 10%. The face value of the issue is $25 million, and the issue sells for 94% of par value. The firm’s tax rate is 35%. a.
b. What is Olympic’
5

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture