Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
11th Edition
ISBN: 9780077861759
Author: Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher: McGraw-Hill Education
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Chapter 18, Problem 15QP
a.
Summary Introduction
To determine: The Value of Equity and price per share before recapitalization plan
Introduction: A flow to equity (FTE) measure of profit that will be designated to investors by another organization other than the issuing organization, similar to a LLC. An Adjusted Present Value (APV) is the
b.
Summary Introduction
To determine: The Value of Equity and price per share after recapitalization plan.
c.
Summary Introduction
To determine: The Shares Repurchased, Value of Equity and the price of share after repurchase is completed.
d.
Summary Introduction
To determine: The Value of Equity after recapitalization using flow to equity method.
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Shadow, Inc., is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4.5 million worth of debt outstanding. The cost of this debt is 8 percent per year. Shadow expects to have an EBIT of $1.8 million per year in perpetuity. Shadow pays no taxes.
(1) What is the expected return on the equity of an otherwise identical all-equity firm?
(2) What is the expected return on the firm’s equity after the announcement of the stock repurchase plan?
Shadow, Inc., is planning to repurchase part of its common stock by issuing corporate debt. As a result, the firm’s debt-equity ratio is expected to rise from 30 percent to 50 percent. The firm currently has $4.5 million worth of debt outstanding. The cost of this debt is 8 percent per year. Shadow expects to have an EBIT of $1.8 million per year in perpetuity. Shadow pays no taxes.
(1) What is the market value of Shadow, Inc. before and after the repurchase announcement?
(2) What is the expected return on the firm’s equity before the announcement of the stock repurchase plan?
ABC Company is currently an unlevered firm. The company expects to generate $152.3 in earnings before EBIT in perpetuity. The corporate tax rate is 21 percent, implying after tax earnings of $120.32. All earnings after tax are paid out as dividends. The firm is considering a capital restructuring to allow $228 of debt. Its cost of debt capital is 10 percent. Unlevered firms in the same industry have a cost of equity capital of 15 percent.
What is the new value of ABC Company?
Round to the nearest cent and format as "XXX.XX"
Chapter 18 Solutions
Corporate Finance (The Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 18 - APV How is the APV of a project calculated?Ch. 18 - WACC and APV What is the main difference between...Ch. 18 - FTE What is the main difference between the FTE...Ch. 18 - Prob. 4CQCh. 18 - Prob. 5CQCh. 18 - NPV and APV Zoso is a rental car company that is...Ch. 18 - APV Gemini, Inc., an all-equity firm, is...Ch. 18 - Prob. 3QPCh. 18 - Prob. 4QPCh. 18 - Prob. 5QP
Ch. 18 - Prob. 6QPCh. 18 - Prob. 7QPCh. 18 - WACC National Electric Company (NEC) is...Ch. 18 - WACC Bolero, Inc., has compiled the following...Ch. 18 - Prob. 10QPCh. 18 - Prob. 11QPCh. 18 - APV MVP, Inc., has produced rodeo supplies for...Ch. 18 - Prob. 13QPCh. 18 - Prob. 14QPCh. 18 - Prob. 15QPCh. 18 - Prob. 16QPCh. 18 - Prob. 17QPCh. 18 - Prob. 18QPCh. 18 - Prob. 1MC
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