WYSIWYG Corporation is 100% equity financed. It is expected to earn $10 per share in pretax...

 

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WYSIWYG Corporation is 100% equity financed. It is expected to earn $10 per share in pretax cash flow every year in perpetuity. Profits after tax are paid out annually as dividends. There are 1 million shares outstanding. The corporation tax rate is 35%. The required return on WYSIWYG equity (and hence its assets) is 11%. Ignore any taxes paid at the personal level. a.) What is WYSIWYG Corporation's annual after-tax cash flow? What will be the market capitalization of WYSIWIG's equity and the value of the firm? b.) Now suppose WYSIWYG decides to undertake a leveraged recapitalization by issuing $12 million in debt at an annual interest rate of 7% and using the proceeds to buy back shares of equity. Assume that the firm's operations do not change. What is the present value of the tax shield from the interest on WYSIWYG's debt? c.) What must be the firm's total (debt plus equity) market capitalization after the recapitalization? What is the value of the firm's debt and the value of its equity? What is the net gain to the equity shareholders of the firm? d.) How many shares had to be bought back to accomplish the recapitalization and what is the new share price? WYSIWYG Corporation is 100% equity financed. It is expected to earn $10 per share in pretax cash flow every year in perpetuity. Profits after tax are paid out annually as dividends. There are 1 million shares outstanding. The corporation tax rate is 35%. The required return on WYSIWYG equity (and hence its assets) is 11%. Ignore any taxes paid at the personal level. a.) What is WYSIWYG Corporation's annual after-tax cash flow? What will be the market capitalization of WYSIWIG's equity and the value of the firm? b.) Now suppose WYSIWYG decides to undertake a leveraged recapitalization by issuing $12 million in debt at an annual interest rate of 7% and using the proceeds to buy back shares of equity. Assume that the firm's operations do not change. What is the present value of the tax shield from the interest on WYSIWYG's debt? c.) What must be the firm's total (debt plus equity) market capitalization after the recapitalization? What is the value of the firm's debt and the value of its equity? What is the net gain to the equity shareholders of the firm? d.) How many shares had to be bought back to accomplish the recapitalization and what is the new share price?

Answer rating: 100% (QA)

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