Firm F has the following features: . EBIT is 120 at time 1 and 2000 at...
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Firm F has the following features: . EBIT is 120 at time 1 and 2000 at time 2. • Debt has face value 1000, coupon rate 5%, and 2-year maturity. Coupon payments are made at time 1 and 2. The cost of debt is 5%. • At both time 1 and 2, the net income is paid to shareholders as a dividend. • The stock price drops at the time the dividend is paid (ex-dividend date = dividend payment date). • At time 2 the firm stops its business. • No personal tax incurred by debtholders. • Personal tax rate incurred by individual shareholders is 15% on dividends and 5% on capital gains. Personal tax rate incurred by institutional shareholders is 0% on dividends and 22% on capital gains. • Firm F's corporate tax rate is 20%. Remark: The notation t+ stands for time t right after cash-flows have been paid. (a) (2 points) Compute the cash-flows to debtholders at time 1 and 2 (CFB (1), CFB (2)) (b) (2 points) Compute the cash-flows to the state (coming from corporate taxes only) at time 1 and 2 (CFT (1), CFT (2)) (c) (2 points) Assume that shareholders are all individuals. Compute the after-tax cash-flows to indi- vidual shareholders at time 1 and 2 (CFSi (1), CFSi (2)) (d) (2 points) Assume that shareholders are all institutions. Compute the after-tax cash-flows to insti- tutional shareholders at time 1 and 2 (CFSƒ (1), CFSƒ (2)) Assume that the after-tax expected return on equity has the following features: • Between time 0 and 1+: 15% for individuals and 20% for institutions. • Between time 1+ and 2: 20% for individuals and 15% for institutions. (e) (2 points) Compute the value of equity at time 1+ when shareholders are all individuals (S¹(1+)). (f) (2 points) Compute the value of equity at time 1+ when shareholders are all institutions (Sf (1+)). (g) (2 points) Compute the value of equity at time 0 when shareholders are all individuals (S¹). Hint: Do as if the stock was bought at time 0 and sold at time 1+. (h) (2 points) Compute the value of equity at time 0 when shareholders are all institutions (Sf). Hint: Do as if the stock was bought at time 0 and sold at time 1+. (i) (2 points) Compute the value of debt at time 0 (B) (j) (2 points) Compute the value of the firm at time 0 when shareholders are all individuals (A¹) (k) (2 points) Compute the value of the firm at time 0 when shareholders are all institutions (Af) (1) (2 points) What kind of shareholders does firm F have to attract to maximize firm value (individuals or institutions)? Firm F has the following features: . EBIT is 120 at time 1 and 2000 at time 2. • Debt has face value 1000, coupon rate 5%, and 2-year maturity. Coupon payments are made at time 1 and 2. The cost of debt is 5%. • At both time 1 and 2, the net income is paid to shareholders as a dividend. • The stock price drops at the time the dividend is paid (ex-dividend date = dividend payment date). • At time 2 the firm stops its business. • No personal tax incurred by debtholders. • Personal tax rate incurred by individual shareholders is 15% on dividends and 5% on capital gains. Personal tax rate incurred by institutional shareholders is 0% on dividends and 22% on capital gains. • Firm F's corporate tax rate is 20%. Remark: The notation t+ stands for time t right after cash-flows have been paid. (a) (2 points) Compute the cash-flows to debtholders at time 1 and 2 (CFB (1), CFB (2)) (b) (2 points) Compute the cash-flows to the state (coming from corporate taxes only) at time 1 and 2 (CFT (1), CFT (2)) (c) (2 points) Assume that shareholders are all individuals. Compute the after-tax cash-flows to indi- vidual shareholders at time 1 and 2 (CFSi (1), CFSi (2)) (d) (2 points) Assume that shareholders are all institutions. Compute the after-tax cash-flows to insti- tutional shareholders at time 1 and 2 (CFSƒ (1), CFSƒ (2)) Assume that the after-tax expected return on equity has the following features: • Between time 0 and 1+: 15% for individuals and 20% for institutions. • Between time 1+ and 2: 20% for individuals and 15% for institutions. (e) (2 points) Compute the value of equity at time 1+ when shareholders are all individuals (S¹(1+)). (f) (2 points) Compute the value of equity at time 1+ when shareholders are all institutions (Sf (1+)). (g) (2 points) Compute the value of equity at time 0 when shareholders are all individuals (S¹). Hint: Do as if the stock was bought at time 0 and sold at time 1+. (h) (2 points) Compute the value of equity at time 0 when shareholders are all institutions (Sf). Hint: Do as if the stock was bought at time 0 and sold at time 1+. (i) (2 points) Compute the value of debt at time 0 (B) (j) (2 points) Compute the value of the firm at time 0 when shareholders are all individuals (A¹) (k) (2 points) Compute the value of the firm at time 0 when shareholders are all institutions (Af) (1) (2 points) What kind of shareholders does firm F have to attract to maximize firm value (individuals or institutions)?
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ANSWER a The cash flow to debtholders at time 1 CFB1 is the coupon payment which is 5 of the face va... View the full answer
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