Cain & Abel Inc. is a publicly listed chain of for-profit mental health services, with their...

 

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Cain & Abel Inc. is a publicly listed chain of for-profit mental health services, with their consultants and psychologists specialising in family therapy. The firm is currently all-equity financed (i.e. unlevered) and has a current share price of $27.31 for each one of its 10.2 million shares outstanding. The firm pays corporate tax at a rate of 35.0%. Cain & Abel intends to lower its corporate taxes by conducting a leveraged recapitalization. That is, by issuing $63.7 million worth of par-value bonds and using the funds raised to immediately repurchase shares. Shareholders in Cain & Abel will expect that the change in debt will be permanent (i.e. interest-only), with the firming being expected to make constant annual interest payments at a rate of 5.2% per annum in perpetuity. Assume that the only capital market imperfection is the presence of corporate taxes (i.e. there are no costs of financial distress, agency costs, etc.). A) What is your best estimate of the value of each share of Cain & Abel Inc. after the firm announces the proposed leveraged recapitalization? That is, what price should investors now willing to pay for shares of the company? The share price should change to $ per share when the firm announces the recapitalization. (Round your answer to 2 decimal places. Use the unrounded value in any subsequent calculations that require it) Now in addition to the presence of corporate taxation, suppose that financial distress (i.e. bankruptcy costs) are another possible capital market imperfection. B) Assume that the share price actually rose to $28.68 per share after the firm announced the leveraged recapitalization. In today's dollars, how much does the market believe that the financial distress costs caused by this additional debt is worth? That is, what present value of financial distress costs do investors believe Cain & Abel will incur as a result of becoming levered with the proposed level of debt financing? The PV of the financial distress costs caused by issuing the debt must be $ (Round your answer to 2 decimal places) million. Cain & Abel Inc. is a publicly listed chain of for-profit mental health services, with their consultants and psychologists specialising in family therapy. The firm is currently all-equity financed (i.e. unlevered) and has a current share price of $27.31 for each one of its 10.2 million shares outstanding. The firm pays corporate tax at a rate of 35.0%. Cain & Abel intends to lower its corporate taxes by conducting a leveraged recapitalization. That is, by issuing $63.7 million worth of par-value bonds and using the funds raised to immediately repurchase shares. Shareholders in Cain & Abel will expect that the change in debt will be permanent (i.e. interest-only), with the firming being expected to make constant annual interest payments at a rate of 5.2% per annum in perpetuity. Assume that the only capital market imperfection is the presence of corporate taxes (i.e. there are no costs of financial distress, agency costs, etc.). A) What is your best estimate of the value of each share of Cain & Abel Inc. after the firm announces the proposed leveraged recapitalization? That is, what price should investors now willing to pay for shares of the company? The share price should change to $ per share when the firm announces the recapitalization. (Round your answer to 2 decimal places. Use the unrounded value in any subsequent calculations that require it) Now in addition to the presence of corporate taxation, suppose that financial distress (i.e. bankruptcy costs) are another possible capital market imperfection. B) Assume that the share price actually rose to $28.68 per share after the firm announced the leveraged recapitalization. In today's dollars, how much does the market believe that the financial distress costs caused by this additional debt is worth? That is, what present value of financial distress costs do investors believe Cain & Abel will incur as a result of becoming levered with the proposed level of debt financing? The PV of the financial distress costs caused by issuing the debt must be $ (Round your answer to 2 decimal places) million.

Answer rating: 100% (QA)

A B CAIN AND ABEL VALUE OF UNLEVERED FIRM NOW VALUE OF THE FIRM ON ... View the full answer