Laval Inc. has a perpetual constant EBIT of $700,000. The firm has a corporate tax rate...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Laval Inc. has a perpetual constant EBIT of $700,000. The firm has a corporate tax rate of 40% and has an unlevered beta of 1.3. The firm has 150,000 common shares issued and outstanding. In the market, you observe that T-bills are being sold to yield 4%, and the S&P/TSX Composite Index is expected to yield 11%. Assume a world of taxes and costs of financial distress. a) Calculate the value of the firm. b) Calculate the WACC for the firm. c) What is the value of a share in the company and what is the EPS? d) What is the value of the firm if the firm issues $500,000 of bonds with a coupon rate of 8% ? Assume the beta of the levered firm is 1.4. e) What is the WACC for the firm with its new capital structure? f) Assuming $500,000 in bonds is the optimal amount of debt, and assuming the markets are efficient and the proceeds of the debt issue are to be used to repurchase shares in the market. What is the offer price for the purchasing of the shares? g) What is the market price of a share and the EPS after the restructuring? Briefly explain why the EPS has changed. Laval Inc. has a perpetual constant EBIT of $700,000. The firm has a corporate tax rate of 40% and has an unlevered beta of 1.3. The firm has 150,000 common shares issued and outstanding. In the market, you observe that T-bills are being sold to yield 4%, and the S&P/TSX Composite Index is expected to yield 11%. Assume a world of taxes and costs of financial distress. a) Calculate the value of the firm. b) Calculate the WACC for the firm. c) What is the value of a share in the company and what is the EPS? d) What is the value of the firm if the firm issues $500,000 of bonds with a coupon rate of 8% ? Assume the beta of the levered firm is 1.4. e) What is the WACC for the firm with its new capital structure? f) Assuming $500,000 in bonds is the optimal amount of debt, and assuming the markets are efficient and the proceeds of the debt issue are to be used to repurchase shares in the market. What is the offer price for the purchasing of the shares? g) What is the market price of a share and the EPS after the restructuring? Briefly explain why the EPS has changed.
Expert Answer:
Answer rating: 100% (QA)
SOLUTION a To calculate the value of the firm we can use the following formula V EBIT r g where V is the value of the firm EBIT is the constant earnings before interest and taxes r is the required rat... View the full answer
Related Book For
Corporate Finance
ISBN: 978-0077861759
10th edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
Posted Date:
Students also viewed these finance questions
-
Echelon Limited has an EBIT of $500,000. The firm has a corporate tax rate of 40% and has an un-levered beta of .85. The firm has 110,000 common shares issued and outstanding. In the market, you...
-
Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...
-
Two solid shafts, each 12 inches long, are connected by gears as shown. They are made of a steel that has a shear modulus of 11,501 ksi and which will fail with a shear stress is 8.9 ksi or if either...
-
The Best Buy Co. Inc. 10-K report has the following footnote related to leasing activities. The future minimum lease payments under our capital and operating leases by fiscal year (not includ- ing...
-
Sax and Lewis12 describe the hazards of breathing air containing appreciable amounts of an asphyxiant (a gas that has no specific toxicity but, when inhaled, excludes oxygen from the lungs). When the...
-
What are haptics?
-
The following data were taken from the financial statements of The Amphlett Corporation, which is all equity financed. Required: 1. Calculate the following ratios for 2016 and 2017: a. Return on...
-
A museum received gifts of two valuable paintings. It recorded the value of one as an asset and recognized the corresponding revenue. It gave no accounting recognition to the other. What might be a...
-
On a graph of a normal distribution curve, the values along the y-axis represent ____________. A. The data values in our sample or population B. The probability that each data value will occur in the...
-
Thompson Distributors packages and distributes industrial supplies. A standard shipment can be packaged in a class A container, a class K container, or a class T container. A single class A container...
-
At the end of January, Higgins Data Systems had an inventory of 8 0 0 units, which cost $ 1 8 per unit to produce. During February the company produced 1 , 8 5 0 units at a cost of $ 2 1 per unit. If...
-
Your investment is as follows: Investment Value Return Stock (RM) (%) Top Glove 35,870 12.3% Medi Health 18,250 11.8% Pavillion 25,600 7.35% Assess the weighted return on the portfolio. % (2...
-
Consider the cointegrated model Yt Xt = 0Xt + vit, Xt-1+U2t, where it and v2t are mean zero serially uncorrelated random variables with E [vtv2j] = 0 for all t and j. Derive the vector error...
-
Hemming Company reported the following current-year purchases and sales for its only product Date January 1 January 16 March 14 March 15 July 30 October 5 Sales Purchase Sales Purchase Activities...
-
Simplify. 28n5 43 5pg 3 7m n 2 20p q
-
Find a peer-reviewed scientific article about a species of your choice (but, it CANNOT be your poster species, and it CANNOT be a species discussed in the course content). and explain how the species...
-
Microsoft has a bond that was issued two years ago. It has a par value of $3,000, the coupon rate of 9%, paid semiannually , and has 4 more years left until it matures. Its yield to maturity is 10%....
-
Use this circle graph to answer following Exercises. 1. What fraction of areas maintained by the National Park Service are designated as National Recreation Areas? 2. What fraction of areas...
-
You are evaluating a project that costs $ 75,000 today. The project has an inflow of $ 155,000 in one year and an outflow of $ 65,000 in two years. What are the IRRs for the project? What discount...
-
What are the prices of a call option and a put option with the following characteristics? Stock price = $93 Exercise price = $90 Risk-free rate = 4% per year, compounded continuously Maturity = 5...
-
Sam McKenzie is the founder and CEO of McKenzie Restaurants, Inc., a regional company. Sam is considering opening several new restaurants. Sally Thornton, the companys CFO, has been put in charge of...
-
Barriers to entry do not protect monopolistic competitive firms in the _________ run. Economic profits will _________ new firms to the industry. Similarly, firms will leave when there are economic...
-
When price is greater than average total costs, the monopolistic competitive firm will make an economic _________.
-
Long-run equilibrium in a monopolistic competitive industry occurs when the firm experiences _________ economic profits or losses, which eliminates incentive for firms to _________ or _________ the...
Study smarter with the SolutionInn App