You have been hired as a management consultant by AD Corporation to evaluate whether it has an

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You have been hired as a management consultant by AD Corporation to evaluate whether it has an appropriate amount of debt (the company is worried about a lever aged buyout). You have collected the following information on AD€™s current position:
€¢ There are 100,000 shares outstanding at $20 per share. The stock has a beta of 1.15.
€¢ The company has $500,000 in longterm debt outstanding and is currently rated BBB. The current market interest rate is 10% on BBB bonds and 6% on Treasury bonds.
€¢ The company€™s marginal tax rate is 40%.
You proceed to collect the data on what increasing debt will do to the company€™s ratings:
You have been hired as a management consultant by AD

aIn addition to the existing debt of $500,000.
a. How much additional debt should the company take on?
b. What will the price per share be after the company takes on new debt? (with 2% growth in perpetuity in value)
c. What is the WACC before and after the additional debt?
d. Assume that you are considering a project that has the following earnings in perpetuity and is of comparable risk to existing projects.
Revenues/year .........$1,000,000
Cost of goods sold ........ $400,000 (includes depreciation of $100,000)
EBIT .............. $600,000
Debt payments ........... $100,000 (all interest payments)
Taxable Income ........ $500,000
Tax ............. $200,000
Aftertax profit ......... $300,000
If this project requires an investment of $3,000,000, what is its NPV?

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...
Perpetuity
Perpetuity refers to payments that are made without an end or maturity date. A perpetuity is classified as an annuity, which is something that earns a dividend or receives a payment at a regularly scheduled interval, generally yearly. So, how...
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