We are given the following information about a Company X Debt-Value Ratio - ...............15% Revenue - ..................$90,000
Question:
We are given the following information about a Company X
Debt-Value Ratio - ...............15%
Revenue - ..................$90,000
Cost - ........................$50,0000
Cost of Debt - ...............5%
Cost of Equity - ..........25%
Shares Outstanding - ..5,000
Corporate Tax - ........30%
(a) What is the firm’s value?
(b) What is its stock price?
(c) Company Y is a leveraged buyout firm. It believes that Company X\'s leverage is too low. It thinks that Company X\'s firm value can increase with higher debt-to-value ratio and believes Company X\'s optimal debt-to-value ratio is 15%. Company X\'s cost of debt at this 15% debt-to-value ratio is 9%. Company Y is considering buying all of Company X\'s shares and increase Company X\'s leverage to the optimal 15% level. Proceeds from debt issuance will be given out to equity holders as special dividend. What is the maximum premium Company Y is willing to pay for Company X\'s shares?
Project Management A Managerial Approach
ISBN: 978-0470533024
8th edition
Authors: Jack R. Meredith, Samuel J. Mantel Jr.