There are some formula right here. If you need it, you can use it.

Morrison Medical Inc., an all-equity firm, has earnings before interest and taxes of $950,000 and an un-levered beta of .80. The firm has 200,000 common shares issued and outstanding. In the market, you observe that Government T-bills are being sold to yield 2% and the S&P/TSX Composite Index is expected to yield 9%. Assume a world with no taxes and no cost for the risk of default. All general M&M assumptions apply. a) What is the market value of the firm? (2 marks) b) What is the WACC for the firm. (1 mark) c) What is the market value of a share in the company and what is the EPS? (2 marks) d) What is the market value of the firm and the market value of the equity if they issue $5,000,000 in debt with a coupon rate of 4.5% and use the proceeds to repurchase shares? (2 marks) c) What is the new cost of equity? (2 marks) 1 According to CAPM, what is the new beta? (2 marks) ) What is the WACC? (2 marks) h) Explain what happens to the market value of the firm and the WACC if the firm increases its debt-to-equity ratio. (1 mark) Formulas from FINA2360 you may find helpful: FV. PV = = (1+r) C PV =- -S 1 1 - PV = FV, NC (+) C T-9 r-9 w- |--491-4 EAR R=[" APR EAR=1+ m EAR = APR-1 APR 17 EPR= 1+ m FV - MV C + t YTMapprox. FV + MV 2 -12- DA P = -& D Pros 1,011+0.5 r1 [S, dT] 1 PVTS D P,= r-g Pps D r [1,0111+0.5r1 d+r)| 1+r 1 1 PV7S Chapter 12: Var(R) = (1/(T-1)[(R - R$*+...+R, - Ry] Geometrie average retum-[(1 + R)*(1+R)x...*(1+R)-1 Chapter 13: E(R)-SRXP G-SR-ER]P E(R)-W*E(R)+W.E(R.) +...+W E(R) o; -Wo+W9; +2w.w.cov, COV, P(R-E(R)XR-E(R) CORR -PAR COV 0 0 E(R)-R, +[E(R.)-R,]xB Cov B. B.-3W-WA+W.B.+._+W. Chapter 14: WACC - W.R.(1-T.)+W,R,+WR fi=W.Jo +14+WfK Amount needed = (1-X Amount Raised) Berando 1+(1-TXD/E) Chapter 11 & 16: Financial leverage and capital structure policy EBIT+ Fixed Cost Sales - Variablecosts %Change EBIT DOL EBIT EBIT %Change Sales -13- EBIT % Change EPS DFL = EBIT - Interest % Change EBIT % Change EPS DCL = % Change Sales DCL = DOL X DFL General formula for M&M V=E+D No tax case EBIT -= V1 = E,+D. R = R +(R-R,)X(D/E) WACC = W.RE+W.R, RS With taxes case EBIT (1-T) (EBIT-1)(1-T.) V E, R, RE V. =V, +DT. R = R +(R, -R,)X(D/E)x (1-T.) WACC =W.R+W R, (1-T.) With taxes and bankruptcy case V. =V,+DT. - PV of financial distress cost