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 16QP
a.
Summary Introduction
To determine: The Total Value of Equity.
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
b.
Summary Introduction
To determine: The Required Return of firm’s Levered Equity
c.
Summary Introduction
To determine: The Value of Company, Value of Equity and the Value of Debt using WACC method.
d.
Summary Introduction
To determine: The Value of Equity using flow to equity method.
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Bluegrass Mint Company has a debt-equity ratio of .30. The required return on the company's unlevered equity is 12
percent and the pretax cost of the firm's debt is 5.8 percent. Sales revenue for the company is expected to remain
stable indefinitely at last year's level of $18,900,000. Variable costs amount to 70 percent of sales. The tax rate is 23
percent and the company distributes all its earnings as dividends at the end of each year.
a.
b.
C-
1.
C-
un
What is the value of the company's equity? (Do not round intermediate calculations and enter your answer in
2. dollars, not millions of dollars, rounded to 2 decimal places, e.g., 1,234,567.89)
C-
u
3.
If the company were financed entirely by equity, how much would it be worth? (Do not round intermediate
calculations and enter your answer in dollars, not millions of dollars, rounded to 2 decimal places, e.g.,
1,234,567.89)
d.
What is the required return on the firm's levered equity? (Do not round intermediate calculations and enter…
WICO Databank Limited has a debt-equity ratio of 0.45. The required return on the company's unlevered (ungeared) equity is 17 per cent, and the pre-tax cost of the firm's debt is 9 per cent. Sales revenue for the company is expected to remain stable indefinitely at last year's level of GHC23,500,000. Variable costs amount to 60 per cent of sales. The tax rate is 25 per cent, and the company distributes all its earnings as dividends at the end of each year.
Required:
a) Use the flow to equity method to calculate the value of the company's equity.
b) What is the required return on the firm's levered (geared) equity)?
c) Use the weighted average cost of capital method to value the company. What is the value of the company's equity? What is the value of the company's debt?
WICO Databank Limited has a debt-equity ratio of 0.45. The required return on the company's unlevered (ungeared) equity is 17 per cent, and the pre-tax cost of the firm's debt is 9 per cent. Sales revenue for the company is expected to remain stable indefinitely at last year's level of GHC23,500,000. Variable costs amount to 60 per cent of sales. The tax rate is 25 per cent, and the company distributes all its earnings as dividends at the end of each year.
Required:
a. If the company were financed entirely by equity, how much would it be worth?
b. What is the required return on the firm's levered (geared) equity)?
c. Use the weighted average cost of capital method to value the company. What is the value of the company's equity? What is the value of the company's debt?
d. Use the flow to equity method to calculate the value of the company's equity.
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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