Augustine Aviation Limited is an all equity company with EBIT of $1,137,500 per year which will...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Augustine Aviation Limited is an all equity company with EBIT of $1,137,500 per year which will continue forever as the company pays out all earnings in the form of dividends (i.e. no growth). As the CFO, you must determine the optimal capital structure for this company. You have been provided with the following additional information: T-bills are currently yielding 2%; the expected return on the market is 8%; the company's tax rate is 40% ; and costs of financial distress apply. Assume the market value of debt is equal to its book value. Cost of Debt (Rd) Value of Debt $0 $4,000,000 $6,000,000 Deege 5% 7% Beta .75 ? 1.7 PV of Financial Distress Costs $400,000 ? a) What is the value and WACC of this all-equity firm? (3 marks) b) What would be the value of the company if it issues $4 million in debt? (2 marks) c) What would be the company's Beta if it issues $4 million in debt? (6 marks) d) What would be the value of the company if it issues $6 million in debt? (5 marks) e) What would be the PV of financial distress costs if the firm issues $6 million in debt? (2 marks) Augustine Aviation Limited is an all equity company with EBIT of $1,137,500 per year which will continue forever as the company pays out all earnings in the form of dividends (i.e. no growth). As the CFO, you must determine the optimal capital structure for this company. You have been provided with the following additional information: T-bills are currently yielding 2%; the expected return on the market is 8%; the company's tax rate is 40% ; and costs of financial distress apply. Assume the market value of debt is equal to its book value. Cost of Debt (Rd) Value of Debt $0 $4,000,000 $6,000,000 Deege 5% 7% Beta .75 ? 1.7 PV of Financial Distress Costs $400,000 ? a) What is the value and WACC of this all-equity firm? (3 marks) b) What would be the value of the company if it issues $4 million in debt? (2 marks) c) What would be the company's Beta if it issues $4 million in debt? (6 marks) d) What would be the value of the company if it issues $6 million in debt? (5 marks) e) What would be the PV of financial distress costs if the firm issues $6 million in debt? (2 marks)
Expert Answer:
Answer rating: 100% (QA)
a Wacc of all equity frim cost of equity as it has only equity and no debt By CAPM cost of equity Ri... View the full answer
Related Book For
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta
Posted Date:
Students also viewed these accounting questions
-
Scott Stationary Limited is an all equity company with EBIT of $850,000 per year which will continue forever as the company pays out all earnings in the form of dividends (i.e. no growth). You must...
-
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...
-
Your team of four people form a financial analysis team at Aussie Finance Consulting (AFC), a renowned financial institution. The executive management of AFC has assigned you a task to carry out a...
-
Stuart and Belinda, who earn good salaries, want to buy a property they can use to live in and operate a bed and breakfast in their retirement. The only funds they have available is their combined...
-
Glass Tech manufactures fiberglass housings for portable generators. One part of the housing is a metal latch. Currently, the company produces the 120,000 metal latch units required annually. Company...
-
During the financial crisis in October 2008, the federal government could borrow at a rate of 2.73% (the yield on five-year Treasury securities). During October 2008, though, Baa borrowers (corporate...
-
Proper recording within general ledger control accounts does not necessarily mean that transactions are posted accurately to individual vendor accounts. What controls can management institute to...
-
Lisa Surowsky was asked to help in determining the best ordering policy for a new product. Currently, the demand for the new product has been projected to be about 1,000 units annually. To get a...
-
Specify and Explain all parts of a SQL Server error message.?
-
How could the owners of Willow Springs have ensured the safety of their customers and prevented the infections from occurring? Explain.
-
Each time someone requests your score, the credit rater compares your credit history to whom? Each time someone requests your score, the credit rater compares your credit history to whom?
-
True or False: When a firm issues equity, it increases the supply of its shares in the market, which should cause its share price to fall.
-
With perfect capital markets, as a firm increases its leverage, how does its debt cost of capital change? Its equity cost of capital? Its weighted average cost of capital?
-
How do we compute the weighted average cost of capital of a firm?
-
In a perfect capital market, how will a firms market capitalization change if it borrows in order to repurchase shares? How will its share price change?
-
Speak to people from five different countries and ask what entrepreneurship means to them and how their national culture helps and/or hinders entrepreneurship.
-
du command is used to a . . how much free space available in all the directories b . . how much disk space the files in the current directory consumed c . . how much disk space the files in all the...
-
KD Insurance Company specializes in term life insurance contracts. Cash collection experience shows that 20 percent of billed premiums are collected in the month before they are due, 60 percent are...
-
A well-known financial institution expects that it will have no earnings for the next three years as the result of restructuring activities. Then it will begin to return to earnings of $3.00 a share....
-
Campbell Electronics Corporation has a wholly owned foreign subsidiary in Jamaica. The subsidiary earns $5 million per year before taxes in Jamaica. The foreign income tax rate is 20 percent....
-
Why use certainty equivalents in a capital budgeting analysis?
-
Identify health care situations in which Tannenbaum and Schmidts Continuum of Leadership Behavior would suggest the autocratic leadership style as the most appropriate.
-
What impact does the assignment of employees to the in-group or out-group (LMX) have on workers performance and satisfaction?
-
Apply the contingency theories discussed in this chapter as they relate to your work environment to assess the appropriate style of leadership and the implications for motivation, satisfaction, and...
Study smarter with the SolutionInn App