Pucket's Buckets, Inc. (PB) currently has an enterprise value (Vo) of $1,147,447. It has a beta...

 

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Pucket's Buckets, Inc. (PB) currently has an enterprise value (Vo) of $1,147,447. It has a beta of 1.3 with a capital structure that includes 30 percent debt. Assume this a zero-growth company (.e. no changes in NOWC and depreciation is the same as capital expenditures) for the foreseeable future. Its marginal tax rate is 30%. PB is considering moving to a capital structure that is comprised of 20 percent debt. Market information is a follows: rating AAA AA A BBB BB Risk-free rate % of debt in default capital spread structure 0.0% 10.0% 1.0% 20.0% 1.5% 30.0% 2.5% 40.0% 3.5% 50.0% 5.0% 4.0% Market Risk Premium 5.0% Required: 1. If they move to a capital structure with 20 percent debt, what is the company's new enterprise value (Vo)? 2. M&M I with taxes uses the equation V₁-Vu+TED to put a value on the firm. What enterprise value would this predict with 20 percent debt in the capital structure? Assume Tc-the firm's tax rate. 3. Why are a) and b) different? Pucket's Buckets, Inc. (PB) currently has an enterprise value (Vo) of $1,147,447. It has a beta of 1.3 with a capital structure that includes 30 percent debt. Assume this a zero-growth company (.e. no changes in NOWC and depreciation is the same as capital expenditures) for the foreseeable future. Its marginal tax rate is 30%. PB is considering moving to a capital structure that is comprised of 20 percent debt. Market information is a follows: rating AAA AA A BBB BB Risk-free rate % of debt in default capital spread structure 0.0% 10.0% 1.0% 20.0% 1.5% 30.0% 2.5% 40.0% 3.5% 50.0% 5.0% 4.0% Market Risk Premium 5.0% Required: 1. If they move to a capital structure with 20 percent debt, what is the company's new enterprise value (Vo)? 2. M&M I with taxes uses the equation V₁-Vu+TED to put a value on the firm. What enterprise value would this predict with 20 percent debt in the capital structure? Assume Tc-the firm's tax rate. 3. Why are a) and b) different?