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1- Cisoft is a highly profitable technology firm that currently has $ 7 billion in cash. The firm has decided to use this cash to repurchase shares from investors, and it has already announced these plans to investors. Currently, Cisoft is an all-equity firm with 22 billion shares outstanding. These shares currently trade for $ 11 per share. Cisoft has issued no other securities except for stock options given to its employees. The current market value of these options is $ 12 billion. a. What is the market value of Cisoft's non-cash assets? (Round to the nearest integer.) b. With perfect capital markets, what is the market value of Cisoft's equity after the share repurchase? What is the value per share? 2- Mercer Corp. has 10 million shares outstanding and $110 million worth of debt outstanding. Its current share price is $ 67$. Mercer's equity cost of capital is 8.5 %. Mercer has just announced that it will issue $301 million worth of debt. It will use the proceeds from this debt to pay off its existing debt, and use the remaining $191 million to pay an immediate dividend. Assume perfect capital markets. a. Estimate Mercer's share price just after the recapitalization is announced, but before the transaction occurs. (Round to the nearest dollar.) b. Estimate Mercer's share price at the conclusion of the transaction. (Hint: Use the market value balance sheet.) c. Suppose Mercer's existing debt was risk-free with a 4.68 % expected return, and its new debt is risky with a 4.88 % expected return. Estimate Mercer's equity cost of capital after the transaction. 3- Suppose the corporate tax rate is 35 %. Consider a firm that earns $1,500 before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 7 %. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? (Round to the nearest dollar.) b. Suppose instead the firm makes interest payments of $ 400 per year. What is the value of equity? What is the value of debt? c. What is the difference between the total value of the firm with leverage and without leverage? d. The difference in (c) is equal to what percentage of the value of the debt? 4- Rumolt Motors has 46 million shares outstanding with a price of $ 53$ per share. In addition, Rumolt has issued bonds with a total current market value of $1,461 million. Suppose Rumolt's equity cost of capital is 12%, and its debt cost of capital is 5%. a. What is Rumolt's pretax weighted average cost of capital? (Round to two decimal places.) b. If Rumolt's corporate tax rate is 38%, what is its after-tax weighted average cost of capital? 5-Markum Enterprises is considering permanently adding an additional $ 91 million of debt to its capital structure. Markum's corporate tax rate is 38 %. a. Absent personal taxes, what is the value of the interest tax shield from the new debt? (million- (Round to two decimal places b. If investors pay a tax rate of 45 % on interest income, and a tax rate of 20 % on income from dividends and capital gains, what is the value of the interest tax shield from the new debt? 6- With its current leverage, Impi Corporation will have net income next year of $ 6.0 million. If Impi's corporate tax rate is 30 % and it pays 7 % interest on its debt, how much debt can Impi issue this year and still receive the benefit of the interest tax shield next year? million. (Round to three decimal places.) 1- Cisoft is a highly profitable technology firm that currently has $ 7 billion in cash. The firm has decided to use this cash to repurchase shares from investors, and it has already announced these plans to investors. Currently, Cisoft is an all-equity firm with 22 billion shares outstanding. These shares currently trade for $ 11 per share. Cisoft has issued no other securities except for stock options given to its employees. The current market value of these options is $ 12 billion. a. What is the market value of Cisoft's non-cash assets? (Round to the nearest integer.) Assets = cash + non-cash; Liabilities = equity + options; Non-cash assets = equity + options - cash = (11 22) + 12 - 7 = 247 billion b. With perfect capital markets, what is the market value of Cisoft's equity after the share repurchase? What is the value per share? Equity = (11*222) - 7=235 Repurchase = 22b/11 = 2 b shares Shares remaining = 22-2 =20 Value per share =235/20 = $11.75 2- Mercer Corp. has 10 million shares outstanding and $110 million worth of debt outstanding. Its current share price is $ 67$. Mercer's equity cost of capital is 8.5 %. Mercer has just announced that it will issue $301 million worth of debt. It will use the proceeds from this debt to pay off its existing debt, and use the remaining $191 million to pay an immediate dividend. Assume perfect capital markets. a. Estimate Mercer's share price just after the recapitalization is announced, but before the transaction occurs. (Round to the nearest dollar.) There will be no change in share price and it will remain at , $67 b. Estimate Mercer's share price at the conclusion of the transaction. (Hint: Use the market value balance sheet.) Initial enterprise value = 67 10 + 110 = 780 million New debt = 301 million E = 780 - 301 = 479 Share price = 479/10 = $47.9 c. Suppose Mercer's existing debt was risk-free with a 4.68 % expected return, and its new debt is risky with a 4.88 % expected return. Estimate Mercer's equity cost of capital after the transaction. Ru = (670/780)8.5% + (110/780)4.68% = 7.96% Re = 7.96% + 301/449(8% - 5%) = 9.97% 3- Suppose the corporate tax rate is 35 %. Consider a firm that earns $1,500 before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 7 %. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? (Round to the nearest dollar.) Net income = 1500* (1-35%) = $975 Thus, equity holders receive dividends of $975 per year with no risk. Equity =975/7% = $13,929 b. Suppose instead the firm makes interest payments of $ 400 per year. What is the value of equity? What is the value of debt? Net income = (1500-400) * (1-35%) = 715 Equity = 715/7% = $10,214 Debt holders receive interest of $400 per year. Therefore, debt = 400/7% = $5,714 c. What is the difference between the total value of the firm with leverage and without leverage? With leverage = 10,214 + 5,714 = $15928 Without leverage = $13,929 Difference = 15928- 13,929 = $1,999 d. The difference in (c) is equal to what percentage of the value of the debt? 1,999/5,714= 35% 4- Rumolt Motors has 46 million shares outstanding with a price of $ 53$ per share. In addition, Rumolt has issued bonds with a total current market value of $1,461 million. Suppose Rumolt's equity cost of capital is 12%, and its debt cost of capital is 5%. a. What is Rumolt's pretax weighted average cost of capital? (Round to two decimal places.) Market value of equity = price*number of shares =53*46 = 2438 million Pretax WACC = cost of debt*Market value of debt/(Market value of equity+Market value of debt)+cost of equity*Market value of equity/(Market value of equity+Market value of debt) = 5*((1461/(1461+2438))+12*((2438/(1461+2438)) = 1.87 + 7.50 = 9.37% b. If Rumolt's corporate tax rate is 38%, what is its after-tax weighted average cost of capital? After tax WACC = cost of debt*(1tax rate)*Market value of debt/(Market value of equity+Market value of debt)+cost of equity*Market value of equity/(Market value of equity+Market value of debt) = (5* 0.62)((1461/(1461+2438))+12*((2438/(1461+2438)) = 1.16 + 7.50 = 8.66% 5-Markum Enterprises is considering permanently adding an additional $ 91 million of debt to its capital structure. Markum's corporate tax rate is 38 %. a. Absent personal taxes, what is the value of the interest tax shield from the new debt? (million- (Round to two decimal places Value of the interest tax shield from the new debt = 91*38% = $34.58 million b. If investors pay a tax rate of 45 % on interest income, and a tax rate of 20 % on income from dividends and capital gains, what is the value of the interest tax shield from the new debt? Interest rate = 1-((1-0.38)*(1-0.20)/(1-0.45)) = 9.82% Value of the interest tax shield from the new debt = 91*9.82% = $8.94 million 6- With its current leverage, Impi Corporation will have net income next year of $ 6.0 million. If Impi's corporate tax rate is 30 % and it pays 7 % interest on its debt, how much debt can Impi issue this year and still receive the benefit of the interest tax shield next year? million. (Round to three decimal places.) Net income after tax = $6.0 million Tax rate = 30% Taxable income = $6.0 million / (1 0.30) = $8.571 million Thus, Impi Corporation can increase itss interest expense by $8.571million Debt that can issued = $8.571million / 0.07 = $122.443 million 1- Cisoft is a highly profitable technology firm that currently has $ 7 billion in cash. The firm has decided to use this cash to repurchase shares from investors, and it has already announced these plans to investors. Currently, Cisoft is an all-equity firm with 22 billion shares outstanding. These shares currently trade for $ 11 per share. Cisoft has issued no other securities except for stock options given to its employees. The current market value of these options is $ 12 billion. a. What is the market value of Cisoft's non-cash assets? (Round to the nearest integer.) Assets = cash + non-cash; Liabilities = equity + options; Non-cash assets = equity + options - cash = (11 22) + 12 - 7 = 247 billion b. With perfect capital markets, what is the market value of Cisoft's equity after the share repurchase? What is the value per share? Equity = (11*222) - 7=235 Repurchase = 22b/11 = 2 b shares Shares remaining = 22-2 =20 Value per share =235/20 = $11.75 2- Mercer Corp. has 10 million shares outstanding and $110 million worth of debt outstanding. Its current share price is $ 67$. Mercer's equity cost of capital is 8.5 %. Mercer has just announced that it will issue $301 million worth of debt. It will use the proceeds from this debt to pay off its existing debt, and use the remaining $191 million to pay an immediate dividend. Assume perfect capital markets. a. Estimate Mercer's share price just after the recapitalization is announced, but before the transaction occurs. (Round to the nearest dollar.) There will be no change in share price and it will remain at , $67 b. Estimate Mercer's share price at the conclusion of the transaction. (Hint: Use the market value balance sheet.) Initial enterprise value = 67 10 + 110 = 780 million New debt = 301 million E = 780 - 301 = 479 Share price = 479/10 = $47.9 c. Suppose Mercer's existing debt was risk-free with a 4.68 % expected return, and its new debt is risky with a 4.88 % expected return. Estimate Mercer's equity cost of capital after the transaction. Ru = (670/780)8.5% + (110/780)4.68% = 7.96% Re = 7.96% + 301/479(8% - 5%) = 9.85% 3- Suppose the corporate tax rate is 35 %. Consider a firm that earns $1,500 before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 7 %. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? (Round to the nearest dollar.) Net income = 1500* (1-35%) = $975 Thus, equity holders receive dividends of $975 per year with no risk. Equity =975/7% = $13,929 b. Suppose instead the firm makes interest payments of $ 400 per year. What is the value of equity? What is the value of debt? Net income = (1500-400) * (1-35%) = 715 Equity = 715/7% = $10,214 Debt holders receive interest of $400 per year. Therefore, debt = 400/7% = $5,714 c. What is the difference between the total value of the firm with leverage and without leverage? With leverage = 10,214 + 5,714 = $15928 Without leverage = $13,929 Difference = 15928- 13,929 = $1,999 d. The difference in (c) is equal to what percentage of the value of the debt? 1,999/5,714= 35% 4- Rumolt Motors has 46 million shares outstanding with a price of $ 53$ per share. In addition, Rumolt has issued bonds with a total current market value of $1,461 million. Suppose Rumolt's equity cost of capital is 12%, and its debt cost of capital is 5%. a. What is Rumolt's pretax weighted average cost of capital? (Round to two decimal places.) Market value of equity = price*number of shares =53*46 = 2438 million Pretax WACC = cost of debt*Market value of debt/(Market value of equity+Market value of debt)+cost of equity*Market value of equity/(Market value of equity+Market value of debt) = 5*((1461/(1461+2438))+12*((2438/(1461+2438)) = 1.87 + 7.50 = 9.37% b. If Rumolt's corporate tax rate is 38%, what is its after-tax weighted average cost of capital? After tax WACC = cost of debt*(1tax rate)*Market value of debt/(Market value of equity+Market value of debt)+cost of equity*Market value of equity/(Market value of equity+Market value of debt) = (5* 0.62)((1461/(1461+2438))+12*((2438/(1461+2438)) = 1.16 + 7.50 = 8.66% 5-Markum Enterprises is considering permanently adding an additional $ 91 million of debt to its capital structure. Markum's corporate tax rate is 38 %. a. Absent personal taxes, what is the value of the interest tax shield from the new debt? (million- (Round to two decimal places Value of the interest tax shield from the new debt = 91*38% = $34.58 million b. If investors pay a tax rate of 45 % on interest income, and a tax rate of 20 % on income from dividends and capital gains, what is the value of the interest tax shield from the new debt? Interest rate = 1-((1-0.38)*(1-0.20)/(1-0.45)) = 9.82% Value of the interest tax shield from the new debt = 91*9.82% = $8.94 million 6- With its current leverage, Impi Corporation will have net income next year of $ 6.0 million. If Impi's corporate tax rate is 30 % and it pays 7 % interest on its debt, how much debt can Impi issue this year and still receive the benefit of the interest tax shield next year? million. (Round to three decimal places.) Net income after tax = $6.0 million Tax rate = 30% Taxable income = $6.0 million / (1 0.30) = $8.571 million Thus, Impi Corporation can increase itss interest expense by $8.571million Debt that can issued = $8.571million / 0.07 = $122.443 million 1- Cisoft is a highly profitable technology firm that currently has $ 7 billion in cash. The firm has decided to use this cash to repurchase shares from investors, and it has already announced these plans to investors. Currently, Cisoft is an all-equity firm with 22 billion shares outstanding. These shares currently trade for $ 11 per share. Cisoft has issued no other securities except for stock options given to its employees. The current market value of these options is $ 12 billion. a. What is the market value of Cisoft's non-cash assets? (Round to the nearest integer.) Assets = cash + non-cash; Liabilities = equity + options; Non-cash assets = equity + options - cash = (11 22) + 12 - 7 = 247 billion b. With perfect capital markets, what is the market value of Cisoft's equity after the share repurchase? What is the value per share? Equity = (11*222) - 7=235 Repurchase = 22b/11 = 2 b shares Shares remaining = 22-2 =20 Value per share =235/20 = $11.75 2- Mercer Corp. has 10 million shares outstanding and $110 million worth of debt outstanding. Its current share price is $ 67$. Mercer's equity cost of capital is 8.5 %. Mercer has just announced that it will issue $301 million worth of debt. It will use the proceeds from this debt to pay off its existing debt, and use the remaining $191 million to pay an immediate dividend. Assume perfect capital markets. a. Estimate Mercer's share price just after the recapitalization is announced, but before the transaction occurs. (Round to the nearest dollar.) There will be no change in share price and it will remain at , $67 b. Estimate Mercer's share price at the conclusion of the transaction. (Hint: Use the market value balance sheet.) Initial enterprise value = 67 10 + 110 = 780 million New debt = 301 million E = 780 - 301 = 479 Share price = 479/10 = $47.9 c. Suppose Mercer's existing debt was risk-free with a 4.68 % expected return, and its new debt is risky with a 4.88 % expected return. Estimate Mercer's equity cost of capital after the transaction. Ru = (670/780)8.5% + (110/780)4.68% = 7.96% Re = 7.96% + 301/449(8% - 5%) = 9.97% 3- Suppose the corporate tax rate is 35 %. Consider a firm that earns $1,500 before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 7 %. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? (Round to the nearest dollar.) Net income = 1500* (1-35%) = $975 Thus, equity holders receive dividends of $975 per year with no risk. Equity =975/7% = $13,929 b. Suppose instead the firm makes interest payments of $ 400 per year. What is the value of equity? What is the value of debt? Net income = (1500-400) * (1-35%) = 715 Equity = 715/7% = $10,214 Debt holders receive interest of $400 per year. Therefore, debt = 400/7% = $5,714 c. What is the difference between the total value of the firm with leverage and without leverage? With leverage = 10,214 + 5,714 = $15928 Without leverage = $13,929 Difference = 15928- 13,929 = $1,999 d. The difference in (c) is equal to what percentage of the value of the debt? 1,999/5,714= 35% 4- Rumolt Motors has 46 million shares outstanding with a price of $ 53$ per share. In addition, Rumolt has issued bonds with a total current market value of $1,461 million. Suppose Rumolt's equity cost of capital is 12%, and its debt cost of capital is 5%. a. What is Rumolt's pretax weighted average cost of capital? (Round to two decimal places.) Market value of equity = price*number of shares =53*46 = 2438 million Pretax WACC = cost of debt*Market value of debt/(Market value of equity+Market value of debt)+cost of equity*Market value of equity/(Market value of equity+Market value of debt) = 5*((1461/(1461+2438))+12*((2438/(1461+2438)) = 1.87 + 7.50 = 9.37% b. If Rumolt's corporate tax rate is 38%, what is its after-tax weighted average cost of capital? After tax WACC = cost of debt*(1tax rate)*Market value of debt/(Market value of equity+Market value of debt)+cost of equity*Market value of equity/(Market value of equity+Market value of debt) = (5* 0.62)((1461/(1461+2438))+12*((2438/(1461+2438)) = 1.16 + 7.50 = 8.66% 5-Markum Enterprises is considering permanently adding an additional $ 91 million of debt to its capital structure. Markum's corporate tax rate is 38 %. a. Absent personal taxes, what is the value of the interest tax shield from the new debt? (million- (Round to two decimal places Value of the interest tax shield from the new debt = 91*38% = $34.58 million b. If investors pay a tax rate of 45 % on interest income, and a tax rate of 20 % on income from dividends and capital gains, what is the value of the interest tax shield from the new debt? Interest rate = 1-((1-0.38)*(1-0.20)/(1-0.45)) = 9.82% Value of the interest tax shield from the new debt = 91*9.82% = $8.94 million 6- With its current leverage, Impi Corporation will have net income next year of $ 6.0 million. If Impi's corporate tax rate is 30 % and it pays 7 % interest on its debt, how much debt can Impi issue this year and still receive the benefit of the interest tax shield next year? million. (Round to three decimal places.) Net income after tax = $6.0 million Tax rate = 30% Taxable income = $6.0 million / (1 0.30) = $8.571 million Thus, Impi Corporation can increase itss interest expense by $8.571million Debt that can issued = $8.571million / 0.07 = $122.443 million 1- Cisoft is a highly profitable technology firm that currently has $ 7 billion in cash. The firm has decided to use this cash to repurchase shares from investors, and it has already announced these plans to investors. Currently, Cisoft is an all-equity firm with 22 billion shares outstanding. These shares currently trade for $ 11 per share. Cisoft has issued no other securities except for stock options given to its employees. The current market value of these options is $ 12 billion. a. What is the market value of Cisoft's non-cash assets? (Round to the nearest integer.) Assets = cash + non-cash; Liabilities = equity + options; Non-cash assets = equity + options - cash = (11 22) + 12 - 7 = 247 billion b. With perfect capital markets, what is the market value of Cisoft's equity after the share repurchase? What is the value per share? Equity = (11*222) - 7=235 Repurchase = 22b/11 = 2 b shares Shares remaining = 22-2 =20 Value per share =235/20 = $11.75 2- Mercer Corp. has 10 million shares outstanding and $110 million worth of debt outstanding. Its current share price is $ 67$. Mercer's equity cost of capital is 8.5 %. Mercer has just announced that it will issue $301 million worth of debt. It will use the proceeds from this debt to pay off its existing debt, and use the remaining $191 million to pay an immediate dividend. Assume perfect capital markets. a. Estimate Mercer's share price just after the recapitalization is announced, but before the transaction occurs. (Round to the nearest dollar.) There will be no change in share price and it will remain at , $67 b. Estimate Mercer's share price at the conclusion of the transaction. (Hint: Use the market value balance sheet.) Initial enterprise value = 67 10 + 110 = 780 million New debt = 301 million E = 780 - 301 = 479 Share price = 479/10 = $47.9 c. Suppose Mercer's existing debt was risk-free with a 4.68 % expected return, and its new debt is risky with a 4.88 % expected return. Estimate Mercer's equity cost of capital after the transaction. Ru = (670/780)8.5% + (110/780)4.68% = 7.96% Re = 7.96% + 301/479(8% - 5%) = 9.85% 3- Suppose the corporate tax rate is 35 %. Consider a firm that earns $1,500 before interest and taxes each year with no risk. The firm's capital expenditures equal its depreciation expenses each year, and it will have no changes to its net working capital. The risk-free interest rate is 7 %. a. Suppose the firm has no debt and pays out its net income as a dividend each year. What is the value of the firm's equity? (Round to the nearest dollar.) Net income = 1500* (1-35%) = $975 Thus, equity holders receive dividends of $975 per year with no risk. Equity =975/7% = $13,929 b. Suppose instead the firm makes interest payments of $ 400 per year. What is the value of equity? What is the value of debt? Net income = (1500-400) * (1-35%) = 715 Equity = 715/7% = $10,214 Debt holders receive interest of $400 per year. Therefore, debt = 400/7% = $5,714 c. What is the difference between the total value of the firm with leverage and without leverage? With leverage = 10,214 + 5,714 = $15928 Without leverage = $13,929 Difference = 15928- 13,929 = $1,999 d. The difference in (c) is equal to what percentage of the value of the debt? 1,999/5,714= 35% 4- Rumolt Motors has 46 million shares outstanding with a price of $ 53$ per share. In addition, Rumolt has issued bonds with a total current market value of $1,461 million. Suppose Rumolt's equity cost of capital is 12%, and its debt cost of capital is 5%. a. What is Rumolt's pretax weighted average cost of capital? (Round to two decimal places.) Market value of equity = price*number of shares =53*46 = 2438 million Pretax WACC = cost of debt*Market value of debt/(Market value of equity+Market value of debt)+cost of equity*Market value of equity/(Market value of equity+Market value of debt) = 5*((1461/(1461+2438))+12*((2438/(1461+2438)) = 1.87 + 7.50 = 9.37% b. If Rumolt's corporate tax rate is 38%, what is its after-tax weighted average cost of capital? After tax WACC = cost of debt*(1tax rate)*Market value of debt/(Market value of equity+Market value of debt)+cost of equity*Market value of equity/(Market value of equity+Market value of debt) = (5* 0.62)((1461/(1461+2438))+12*((2438/(1461+2438)) = 1.16 + 7.50 = 8.66% 5-Markum Enterprises is considering permanently adding an additional $ 91 million of debt to its capital structure. Markum's corporate tax rate is 38 %. a. Absent personal taxes, what is the value of the interest tax shield from the new debt? (million- (Round to two decimal places Value of the interest tax shield from the new debt = 91*38% = $34.58 million b. If investors pay a tax rate of 45 % on interest income, and a tax rate of 20 % on income from dividends and capital gains, what is the value of the interest tax shield from the new debt? Interest rate = 1-((1-0.38)*(1-0.20)/(1-0.45)) = 9.82% Value of the interest tax shield from the new debt = 91*9.82% = $8.94 million 6- With its current leverage, Impi Corporation will have net income next year of $ 6.0 million. If Impi's corporate tax rate is 30 % and it pays 7 % interest on its debt, how much debt can Impi issue this year and still receive the benefit of the interest tax shield next year? million. (Round to three decimal places.) Net income after tax = $6.0 million Tax rate = 30% Taxable income = $6.0 million / (1 0.30) = $8.571 million Thus, Impi Corporation can increase itss interest expense by $8.571million Debt that can issued = $8.571million / 0.07 = $122.443 million