Use the WACC- CORPORATE FINANCE You are analyzing BASC, a giant chemical firm. The firm's business is
Question:
Use the WACC- CORPORATE FINANCE
You are analyzing BASC, a giant chemical firm. The firm's business is pretty low-risk. The required return on assets, equity and debt are all equal to 3% per year. In June 2020, BASC issued its first debt and used the proceeds of 30 million DKK to retire equity. Due to the debt issuance, the total firm value increased from 100 million DKK to 102.5 million DKK. The corporate tax rate is 29%. You know that the firm can only go bankrupt in 4 years (at the end of year 4; not before and not after). Bankruptcy would lead to costs of 35 million DKK.
a) What is the implied probability that the firm goes bankrupt at the end of 4 years?
b) You obtain the additional information that BASC has annual revenues of 0.5 million DKK. Does this change your answer to sub-question a)? If yes, how?
c) The market value of equity does not depend on a firm's capital structure." Briefly comment on this statement.
d) Generally (i.e. not specific to BASC): If, in perfect capital markets, a firm increases its debt ratio, both the required return on equity and the required return on debt rise. Yet, the required return on total assets stays constant. How is that possible?
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta