Question $2$

Consider Table $1.$ Food Inc. has assets that pay earnings before interest and tax

$($EBIT$)$ of either $140$ million or $100$ million in one year from now $($after which the

company shuts down$),$ each with probability $50\%.($Total $50$ Marks$)$

a$.$ Consider Table $1.$ Assume perfect capital markets. Calculate the market value

of Food Inc.$\text{'}$s equity and its price per share. Detail all calculations that you

use.

$(10$ Marks$)$

b$.$ Consider Table $1.$ Assume that the capital market is not perfect, and the

corporate tax rate is $30\%.$ Calculate the cash flows for equity holders at $t=1.$

Detail all calculations that you use.

$(14$ Marks$)$

c$.$ Consider Table $1.$ Assume that the capital market is not perfect, and the

corporate tax rate is $30\%,$ and the market capitalization of Food Inc.$\text{'}$s equity

is $50$ million. What is the after$-$tax weighted average cost of capital $($after$-$tax

WACC$)?$ What is the cost of levered equity? Detail all calculations that you

use.

$(12$ Marks$)$

d$.$ Consider Table $1.$ Assume that the capital market is not perfect, and the

corporate tax rate is $30\%,$ and the market capitalization of Food Inc.$\text{'}$s equity

is $50$ million. Given the after$-$tax WACC calculated from Question $2-$c$,$ what

is the present value of the firm? Is the price of Food Inc. overvalued or

undervalued, why? Detail all calculations that you use.

$(14$ Marks$)$