The SI Corporation operates in an economy with no taxes and perfect capital markets, i.e., it operates
Question:
The SI Corporation operates in an economy with no taxes and perfect capital markets, i.e., it operates in a perfect Modigliani-Miller world. It has an expected operating income of $100 million per year forever.
The expected payment to debt holders is $40 million per year forever and the expected payment to equity holders is $60 million per year forever. The expected rate of return on the firm's assets is 12%. The rate of return on the market portfolio (i.e., rM) is 16% and the risk-free rate (i.e., rF) is 6%. The firm's debt has currently a beta of 0.4. What is the:
(i) total firm value?
(ii) value of the firm's debt?
(iii) value of the firm's equity
The firm has decided to change its debt/equity ratio by issuing equity and using the funds to repurchase debt. After this change in capital structure, the firm's remaining debt will be risk-free and the expected amount paid to debtholders will be $20 million per year forever. After the change in capital structure, What is the:
(i) Total firm value?
(ii) Value of the firm's debt?
(iii) Value of the firm's equity?
Macroeconomics Principles, Applications, and Tools
ISBN: 978-0132555234
7th Edition
Authors: Arthur O Sullivan, Steven M. Sheffrin, Stephen J. Perez