Morrison Medical Inc., an all-equity firm, has earnings before interest and taxes of $950,000, an un-levered...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Morrison Medical Inc., an all-equity firm, has earnings before interest and taxes of $950,000, an un-levered beta of .80 and a tax rate = 35%. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume a world with taxes and a cost for the risk of default. All general M&M assumptions apply. You have also been provided the following information: Value of Debt Cost of Debt (Rd) Beta PV of Financial Distress Costs 0.80 $5,000,000 5.5% $800,000 $7,000,000 7.0% 2 ? a) What is the market value of the firm? b) What is the market value of the firm and the market value of the equity if they issue $5,000,000 in debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? c) What is the new cost of equity? d) According to CAPM, what is the new beta? e) Why is the beta calculated in problem 3(d) different than the betas you calculated in problems 1(f) and 2 (d)? f) What is the market value of the firm if the firm issues $7,000,000 in debt? (5 marks) g) What would be the PV of financial distress costs if the firm issues $7,000,000 in debt? h) What is the optimal level of debt $0, $5,000,000 or $7,000,000? Explain. Morrison Medical Inc., an all-equity firm, has earnings before interest and taxes of $950,000, an un-levered beta of .80 and a tax rate = 35%. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume a world with taxes and a cost for the risk of default. All general M&M assumptions apply. You have also been provided the following information: Value of Debt Cost of Debt (Rd) Beta PV of Financial Distress Costs 0.80 $5,000,000 5.5% $800,000 $7,000,000 7.0% 2 ? a) What is the market value of the firm? b) What is the market value of the firm and the market value of the equity if they issue $5,000,000 in debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? c) What is the new cost of equity? d) According to CAPM, what is the new beta? e) Why is the beta calculated in problem 3(d) different than the betas you calculated in problems 1(f) and 2 (d)? f) What is the market value of the firm if the firm issues $7,000,000 in debt? (5 marks) g) What would be the PV of financial distress costs if the firm issues $7,000,000 in debt? h) What is the optimal level of debt $0, $5,000,000 or $7,000,000? Explain.
Expert Answer:
Answer rating: 100% (QA)
a Calculate the market value of the firm as follows R... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
A project has earnings before interest and taxes of $5,750, fixed costs of $50,000, a selling price of $13 a unit, and a sales quantity of 11,500 units. Depreciation is $7,500. What is the variable...
-
Bukanis firm has earnings before interest and taxes of $160000. both the book and the market value of debt is $300000. Bukanis unlevered cost of equity is 12% while your cost of debt is 8%. the tax...
-
In 2020, Zip had earnings before interest and taxes of $6,200 million and had an effective tax rate of 35%. The price per share is $12 while the estimated market value of debt is $12,200 million. We...
-
Northwest Building Products (NBP) manufactures two lumber products from a joint milling process: residential building lumber (RBL) and commercial building lumber (CBL). A standard production run...
-
Canada Brewers Ltd. has just created a new division to manufacture and sell single-cup coffee makers under licence from a major single-cup coffee producer. The facility is highly auto- mated and so...
-
Lauprechta Inc. has the following employees on payroll: Complete the table for taxes to be withhold for each pay period. Withholding Semimonthly Pavroll S4,800 7,250 $2,800 S3,600 Marital Status...
-
Much like the medical and legal fields, members of the actuarial profession face interesting problems and are generally well compensated for their efforts in resolving these problems. Also like the...
-
Suppose that the attorney the Metzgars hired agreed to represent them on a contingency-fee basis. What does that mean? Ronald Metzgar placed his fifteen-month-old son, Matthew, awake and healthy, in...
-
Problem 2 (40 pts) Washer - 20 dia. 1.5 long. (must be free to move up and down the shaft against the weak spring) Shaft 5 dia. 50 long (Dimensions mm) 0000 Open-ended spring 6 dia. 40 long Snap...
-
Valencia Products makes automobile radar detectors and assembles two models LaserStop and SpeedBuster. Both models use the same electronic components. After reviewing the components required and the...
-
write the codes that requests for a five - digit integer ( only ! , reject all non - 5 - digits numbers ) from the user. Separate the numbers into individual digits, then print them separated by...
-
Activity Cost Pool Labor-related Machine-related Machine setups Production orders Shipments General factory Cost and activity data have been supplied for the following products: Activity Rates $8.00...
-
Consider the following graph with edges and vertices defined as follows: Start North A B C D E J F K G H L Finish Write an application which implements this graph maze using reference to a Node...
-
Liz, Incorporated, produces and sells a single product. The product sells for $172 per unit and its variable expense is $77 per unit. The company's monthly fixed expense is $266,000. Required:...
-
Assume common data sizes (char = 1 byte, short = 2, int = 4, long = 8, float = 4, double = 8) and that alignment requirements follow the data size. struct { char c[ 2 ]; int i[ 4 ]; double d[ 2]; }...
-
What is the macroeconomic impact of an unexpected interest rate cut if prices are flexible? A . . Inflation will rise B . . Output will increase C . . Output will fall D . . Inflation will fall
-
Suppose the number 6 2 1 3 4 5 6 2 1 3 4 5 is inserted in a binary search tree. What would be the inorder traversal of the tree?
-
10m solution. If Ka(HA) = 10 then pOH of solution will be [Given : log4=0.6] (A) 6.7 (B) Greater than 6.7 & less than 7.0 (C) Greater 7.0 & less than 7.3 (D) Greater than 7.3
-
If Local Co., the company in Problem 12, had interest expense of $800,000, how would that affect each of its margins?
-
Assume that you have shorted the put option in Problem 4. a. If the stock is trading at $8 in three months, what will you owe? b. If the stock is trading at $23 in three months, what will you owe? c....
-
You are thinking about buying a piece of art that costs $50,000. The art dealer is proposing the following deal: He will lend you the money, and you will repay the loan by making the same payment...
-
Identify something you own, perhaps even something you still use regularly. a. Give a list of at least six reasons why you might consider replacing the identified item. b. Identify at least two...
-
A company owns a 6-year-old gear hobber that has a book value of \($60,000.\) The present market value of the hobber is \($80,000.Anew\) gear hobber can be purchased for \($450,000.\) Using an...
-
Ten reasons why companies use equipment long after replacements would be justified economically. In many cases, these reasons do not apply just to companies; rather, they apply to us as individuals....
Study smarter with the SolutionInn App