Laval Inc. has a perpetual constant EBIT of $700,000. The firm has a corporate tax rate...

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Laval Inc. has a perpetual constant EBIT of $700,000. The firm has a corporate tax rate of 40% and has an unlevered beta of 1.3. The firm has 150,000 common shares issued and outstanding. In the market, you observe that T-bills are being sold to yield 4%, and the S&P/TSX Composite Index is expected to yield 11%. Assume a world of taxes and costs of financial distress. a) Calculate the value of the firm. b) Calculate the WACC for the firm. c) What is the value of a share in the company and what is the EPS? d) What is the value of the firm if the firm issues $500,000 of bonds with a coupon rate of 8% ? Assume the beta of the levered firm is 1.4. e) What is the WACC for the firm with its new capital structure? f) Assuming $500,000 in bonds is the optimal amount of debt, and assuming the markets are efficient and the proceeds of the debt issue are to be used to repurchase shares in the market. What is the offer price for the purchasing of the shares? g) What is the market price of a share and the EPS after the restructuring? Briefly explain why the EPS has changed. Laval Inc. has a perpetual constant EBIT of $700,000. The firm has a corporate tax rate of 40% and has an unlevered beta of 1.3. The firm has 150,000 common shares issued and outstanding. In the market, you observe that T-bills are being sold to yield 4%, and the S&P/TSX Composite Index is expected to yield 11%. Assume a world of taxes and costs of financial distress. a) Calculate the value of the firm. b) Calculate the WACC for the firm. c) What is the value of a share in the company and what is the EPS? d) What is the value of the firm if the firm issues $500,000 of bonds with a coupon rate of 8% ? Assume the beta of the levered firm is 1.4. e) What is the WACC for the firm with its new capital structure? f) Assuming $500,000 in bonds is the optimal amount of debt, and assuming the markets are efficient and the proceeds of the debt issue are to be used to repurchase shares in the market. What is the offer price for the purchasing of the shares? g) What is the market price of a share and the EPS after the restructuring? Briefly explain why the EPS has changed.

Answer rating: 100% (QA)

SOLUTION a To calculate the value of the firm we can use the following formula V EBIT r g where V is the value of the firm EBIT is the constant earnings before interest and taxes r is the required rat... View the full answer