Question: Here is all the information. This is everything I have. Please help me solve this problem. I really need assistance M&M Proposition 1 (With Taxes)
M&M Proposition 1 (With Taxes) Alpha Tech's CFO is comparing his company against Beta Corp. He's curious as to why Beta decided to have debt in its capital structure and is wondering if Alpha should do the same. Assume that now the government is imposing a 20% corporate tax rate. Beta has perpetual debt. Use facts from the previous problems when needed, but do not forget that now we're dealing with taxes, whereas in previous calculations we were in a world of no taxes (this will change your previous answers). 9) Calculate the value of Alpha Tech (i.e. calculate the value of the unlevered firm) (2 pts) 10) Calculate the value of Beta Corp (i.e. calculate the value of the levered firm)(perpetual debt) (2 pts) 11) If Alpha were to mimic Beta's capital structure and borrow the same amount of money, what would be the increase in value of Alpha after taking out the loan? (hint: look at the results from the previous questions) (2 pts) M&M Proposition 1 (No Taxes) Alpha Tech and Beta Corp are identical companies except for their capital structures. Alpha has no debt on its balance sheet and 10,000 shares outstanding, each worth $100 Beta managed to raise $400,000 in debt at a cost of 8% perpetual debo. There's a 0% corporate tax rate. 1) How m. much are the assets of Alpha Tech worth? 2 pts) Assets = 10,000 x 100 = 51,000,000 2) How much are the assets of Beta Corp worth? (2 pts) Assets = $1,000,000 3) What is Beta Corp's value of equity? 12 pts) Value of Equity - 1,000,000 - 400,000 - $600.000 4) Assuming that Beta Corp's shares are worth the same as Alpha Tech's shares how many outstanding shares does Beta heve? (2 pes) . # of Outstanding Shares - 600000/100 = 6000 5) How much would it cost to buy 25% of the shares otstanding of each company? (2 pts) 25% * 1,000,000 - $250,0000 25% x 600,000 - $150,000 M&M Proposition II (No Taxes) You have $60,000 and are looking to invest Bon Alpha and Beta have caught your eye. Both firms have EBIT of $100.000 in perpetually. There's a 0 corporate tax rate. Use the company facts from the previous problems when needed 6) Watum onegut would you receive you were to buy Alpha Tech shares with your $60.000? (2) ROE - Return / Equity ROE $100.000 / $1,000,000 ROE 10% 7) What return on equity would you receive you to buy Beta Corpshares with your $60,000? (Assume that Belahas perpede 2 pts) ROE - Return / Equity ROE - $100,000 / 5600,000 ROE - 16.7% 8) Which return is higher and why? pts) M&M Proposition 1 (With Taxes) Alpha Tech's CFO is comparing his company against Beta Corp. He's curious as to why Beta decided to have debt in its capital structure and is wondering if Alpha should do the same. Assume that now the government is imposing a 20% corporate tax rate. Beta has perpetual debt. Use facts from the previous problems when needed, but do not forget that now we're dealing with taxes, whereas in previous calculations we were in a world of no taxes (this will change your previous answers). 9) Calculate the value of Alpha Tech (i.e. calculate the value of the unlevered firm) (2 pts) 10) Calculate the value of Beta Corp (i.e. calculate the value of the levered firm)(perpetual debt) (2 pts) 11) If Alpha were to mimic Beta's capital structure and borrow the same amount of money, what would be the increase in value of Alpha after taking out the loan? (hint: look at the results from the previous questions) (2 pts) M&M Proposition 1 (No Taxes) Alpha Tech and Beta Corp are identical companies except for their capital structures. Alpha has no debt on its balance sheet and 10,000 shares outstanding, each worth $100 Beta managed to raise $400,000 in debt at a cost of 8% perpetual debo. There's a 0% corporate tax rate. 1) How m. much are the assets of Alpha Tech worth? 2 pts) Assets = 10,000 x 100 = 51,000,000 2) How much are the assets of Beta Corp worth? (2 pts) Assets = $1,000,000 3) What is Beta Corp's value of equity? 12 pts) Value of Equity - 1,000,000 - 400,000 - $600.000 4) Assuming that Beta Corp's shares are worth the same as Alpha Tech's shares how many outstanding shares does Beta heve? (2 pes) . # of Outstanding Shares - 600000/100 = 6000 5) How much would it cost to buy 25% of the shares otstanding of each company? (2 pts) 25% * 1,000,000 - $250,0000 25% x 600,000 - $150,000 M&M Proposition II (No Taxes) You have $60,000 and are looking to invest Bon Alpha and Beta have caught your eye. Both firms have EBIT of $100.000 in perpetually. There's a 0 corporate tax rate. Use the company facts from the previous problems when needed 6) Watum onegut would you receive you were to buy Alpha Tech shares with your $60.000? (2) ROE - Return / Equity ROE $100.000 / $1,000,000 ROE 10% 7) What return on equity would you receive you to buy Beta Corpshares with your $60,000? (Assume that Belahas perpede 2 pts) ROE - Return / Equity ROE - $100,000 / 5600,000 ROE - 16.7% 8) Which return is higher and why? pts)
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