Tarzan Health Center has no debt but is considering two plans to add leverage. Plan A...
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Tarzan Health Center has no debt but is considering two plans to add leverage. Plan A - issue P200,000 bonds Plan B - issue P300,000 bonds The proceeds from both proposals shall be used to return the same amount of common stock. Management wants to evaluate the impact of increasing THC's financial leverage. Data about the corporations current and proposed capital structure follow: Current Plan A Plan B Required: Cost of debt (K₁) Cost of equity (Ks) EBIT Debt (D) Interest (1) 0 100 P 100,000 0 0 070 105 P 100,000 200,000 14,000 .09 .12 P 100,000 300,000 27,000 1. What is the market value of the equity under Plan A? 2. What is the market value of the firm under Plan B? 3. What is the weighted average cost of capital under Plan A? 4. What is the weighted average cost of capital under Plan B? Tarzan Health Center has no debt but is considering two plans to add leverage. Plan A - issue P200,000 bonds Plan B - issue P300,000 bonds The proceeds from both proposals shall be used to return the same amount of common stock. Management wants to evaluate the impact of increasing THC's financial leverage. Data about the corporations current and proposed capital structure follow: Current Plan A Plan B Required: Cost of debt (K₁) Cost of equity (Ks) EBIT Debt (D) Interest (1) 0 100 P 100,000 0 0 070 105 P 100,000 200,000 14,000 .09 .12 P 100,000 300,000 27,000 1. What is the market value of the equity under Plan A? 2. What is the market value of the firm under Plan B? 3. What is the weighted average cost of capital under Plan A? 4. What is the weighted average cost of capital under Plan B?
Expert Answer:
Answer rating: 100% (QA)
1 Market Value of Equity under Plan A Under Plan A THC issues 200000 worth of bonds This means that the value of the common equity should be the same ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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