Trident Corporation is currently worth $1,000,000. Its current debt-to-value (D/V) ratio is 40%. The company is confident

Question:

Trident is currently worth $1,000,000. Its current debt-to-value (D/V) ratio is 40%. The company is confident in meeting its debt obligation, and wants to introduce more debt to take advantage of the tax shield of interest payment. It is planning to repurchase part of the by issuing more corporate debt. As a result, the firm's debt value is expected to rise from $400,000 to $500,000. The is 10 percent per year. Trident expects to have an EBIT of $200,000 per year in perpetuity. Trident's tax rate is 50%.
a. What would be the market value of Trident if it were unlevered? What would be the on equity if Trident were an all-equity firm?
b. What is the on the firm's equity before the announcement of the stock repurchase plan?
c. What is the value of equity after the announcement of the stock repurchase plan? How much money do the equityholders expect to receive each year under the new capital structure? What is the on the firm's equity after the announcement?
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...