Question

Clarion Manufacturing Company is a publicly held company that is engaged in the manufacture of home and office furniture. The firm’s most recent income statement and balance sheet are found below.
a. Clarion’s future operating earnings are flat ( i. e., no growth), and it anticipates making capital expenditures equal to depreciation expense with no increase anticipated in the firm’s net working capital. What is the value of the firm using the APV model? To respond to this question, you may assume the following: The firm’s current borrowing rate is the same as the 9% rate it presently pays on its debt, all the firm’s liabilities are interest bearing, the firm’s “ unlevered” cost of equity is 12%, and the firm’s tax rate is 30%.
b. What is the value of Clarion’s equity (i. e., its levered equity) under the circum-stances described in part (a)?
c. What is Clarion’s weighted average cost of capital, given your answers to parts (a) and ( b)?
d. Based on your answers to parts (a) to (c), what is Clarion’s levered cost of equity? 7
e. If the risk- free rate is 5.25% and the market risk premium is 7%, what is Clarion’s levered beta? What is Clarion’s unlevered beta?


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  • CreatedNovember 13, 2015
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